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FEDERAL 

INCOME  TAX 


A  PLAIN  PRESENTATION  OF  THE  COMPLEX  LAW 

FOR  THE  BENEFIT  OF  THE  LAWYER 

AND  THE  BUSINESS  MAN 


BRUCE  CRAVEN 
Attorney  and  Counselor  at  Law,  Trinity,  N.  C. 

Author  of  Torrens  Title  Systems,  Synopsis  of  Corporation  Law, 
Member  of  American  Bar  Association,  Etc. 


R.  0.  EVERETT 
of  the  Durham,  N.  C,  Bar 

Of  the  Law  Firm  of  Manning,  Everett  &  Kitchin, 
Member  of  American  Bar  Association,  Etc. 


Raleigh,  N.  0. 

Edwaeds  &  Beoughton  Peinting  00. 

1916 


'■ 


COPYRIGHT.  1916,  BY 
BRUCE  CRAVEN 


CONTENTS 

(Alphabetical  Index  in  Last  Part  of  Volume) 


Frontispiece:  Chart  of  Statistics. 

Introduction:   Purpose  and  aim  of  book;  general  view  of  contents; 

how  to  use  Index;  proposed  amendments  to  present  law,  etc. 
Abbreviations. 
Summary.  PART  I 

Analysis.    (Pages  1-39.) 

HI.  Necessity  for  Taxation. 

H2.  Income  Tax  Theory. 

113.  First  Taxes  Were  Income  Taxes. 

1[4.  Income  Taxes  in  Europe. 

1[5.  State  Income  Taxation. 

H6.  Constitutional  Provisions. 

T7.  Direct  and  Indirect  Taxation. 

H8.  First  National  Laws. 

H9.  The  Act  of  1894. 

K10.  The  Pollock  Case. 

1111.  Corporation  Excise  Tax  of  1909. 

H12.  Sixteenth  Amendment. 

H13.  Constitutionality  of  New  Law. 

H14.  The  Act  of  October  3,  1913. 

1115.  Corporation  Income  Tax. 

U16.  Rate  of  the  Individual  Tax. 

1117.  Who  Must  Make  Returns  of  Income. 

K18.  Gross  Income  Defined. 

H19.  Nontaxable  Gross  Income. 

1f20.  Net  Income  Defined. 

H21.  Expenses  of  Conducting  Business. 

H22.  Interest  Paid  on  Debts. 

H23.  Taxes  Deductible. 

124.  Losses  Deductible. 

125.  Debts  Proven  Worthless. 
1126.  Depreciation. 

127.  Exemptions  from  Net  Income. 

128.  Bonds. 

129.  Gifts  and  Bequests. 
H30.  Life  Insurance. 

131.  Salaries. 

132.  Withholding  at  Source. 

133.  Fiduciaries. 

734.  Foreign  Corporations. 

135.  Americans  Residing  Abroad. 

136.  Partnerships. 

iii 


342179 


IV 


Contents 


1[37.  Time  and  Place  for  Making  Returns. 

U38.  Banks. 

1139.  Surplus  and  Undivided  Profits. 

1140.  Penalties  and  Fines. 
1)41.  Inspection  of  Returns. 

1142.  Powers  of  the  Collectors. 

1143.  Insurance  Companies. 
1)44.  Assessment. 

1f45.  Nonresident  Aliens. 

1f46.  "Accrued  Income"  Defined. 

K47.  Professional  Fees. 

H48.  Rents. 

H49.  Dividends. 

1150.  Income  from  Sales  of  Property. 

1151.  Income  from  Farming. 

1152.  Husband  and  Wife,  Joint  Income. 
1f53.  Forms  for  Returns. 

U54.  Protests  of  Taxpayers. 

1155.  License  for  Foreign  Collections. 

1f56.  Patents  and  Patent  Rights. 

U57.  Corporation  Bookkeeping. 

H58.  Individual  Exemption. 


PART  II 
The  Complete  Statute  Law.    (Pages  41-75.) 

PAGE 

Section  A.  Levying  tax   43 

Section  B.  Deductions 45 

Section  C.  $3,000  exemption 47 

Section  D.  Returns  47 

Section  E.  Assessment,  withholding   50 

Section  F.  Penalty  for  false  return 55 

Section  G.  Tax  on  corporations 56 

Section  H.  "State"  construed 69 

Section  I.  Collection  laws   69 

Section  J.  Receipts 72 

Section  K.  Jurisdiction  of  courts   73 

Section  L.  Laws  made  applicable 73 

Section  M.  Philippines  and  Porto  Rico 74 

Section  S.  Excise  tax  to  1913 74 

PART  III 
Tbeasury  Regulations  (199  Articles).    (Pages  79-164.) 

Part  1.  Individual  income 81-  94 

Part  2.  Collections  at  source  95-120 

Part  3.  Corporations  121-159 

Part  4.  Assessment  and  collection  160-164 


Contents  v 

PART  IV 
Tbeasdbt  Depabtjient  Rulings.    (Pages  165-320.) 

PAGE 

T.  D.  1892.     Government  bonds   167 

T.  D.  1933.     Mutual  companies 168 

T.  D.  1937.    Corporation  excise  tax 169 

T.  D.  1943.     Fiduciaries 170 

T.  D.  1945.     Income  from  dividends  175 

T.  D.  1946.     Special  assessment  districts 176 

T.  D.  1947.     Fiduciaries    177 

T.  D.  1948.     Tax-free  covenants   177 

T.  D.  1950.     Returns,  time,  and  penalties 178 

T.  D.  1956.     Collectors  to  answer  inquiries 179 

T.  D.  1957.     Partnerships   180 

T.  D.  1960.     Corporation  interest  deduction 181 

T.  D.  1961.     Returns  by  fiduciaries 183 

T.  D.  1962.     Returns  held  confidential  183 

T.  D.  1965.     Withholding  agents    184 

T.  D.  1967.     Exempt  corporations,  etc 184 

T.  D.  1973.     Withholding  agent,  form  revised 185 

T.  D.  1974.     Tax  on  bond  income  withheld 186 

T.  D.  1976.     Forms,  withholding  tax  188 

T.  D.  1977.     Forms,  foreign  agents,  etc 198 

T.  D.  1986.     Banks,  withholding  certificate 200 

T.  D.  1988.     Nonresident  aliens,  United  States  agents 201 

T.  D.  1989.     Deductible  losses 201 

T.  D.  1992.     Foreign  corporation  bonds  201 

T.  D.  1993.     Corporation,  deductible  interest 203 

T.  D.  1996.     Cooperative  dairies 206 

T.  D.  1997.     Monthly  withholding  returns 207 

T.  D.  1998.     Withholding  exemption  certificates  298 

T.  D.  2001.     Corporation  fiscal  year 209 

T.  D.  2005.     Deductible  losses,  depreciation  211 

T.  D.  2006.     Defining  foreign  corporation  and  fiscal  agent 213 

T.  D.  2011.     Commissions,  insurance  premiums 215 

T  D.  2012.     Aliens,  dividend  exemptions 215 

T.  D.  2013.     Aliens,  amending  T.  R.  8 216 

T.  D.  2015.     Compromises,  penalties  217 

T.  D.  2016.     Inspection  of  returns  218 

T.  D.  2017.     Aliens,  dividend  exemption 218 

T.  D.  2022.     Withholding  bond  interest  tax 222 

T.  D.  2023.     Foreign  collections,  amending  T.  R.  58 222 

T.  D.  2024.     Amending  T.  R.  192,  collectors 223 

T.  D.  2029.     Corporation  fiscal  year 224 

T.  D.  2048.     Dividends  from  net  earnings 225 

T.  D.  2049.     Certificates,  exemption,  etc.,  not  taxed 226 

T.  D.  2077.     Capital  assets,  deductible  depreciation 227 


vi  Contents 

PAGE 

T.  D.  2079.     Mileage,  subsistence,  etc 228 

T.  D.  2090.     Synopsis  of  rulings   230-261 

T.  D.  2109.     Aliens,  amending  T.  R.  8 216 

T.  D.  2130.     Excise  tax,  explaining  T.  D.  2005 261 

T.  D.  2131.     Refund  of  tax  withheld 263 

T.  D.  2135.     Synopsis  of  rulings 265-275 

T.  D.  2137.     Synopsis  of  rulings 275-293 

T.  D.  2152.     Synopsis  of  rulings 293-300 

T.  D.  2153.     Farm  products  303 

T.  D.  2161.     Synopsis  of  rulings 302 

T.  D.  2162.     Extending  T.  D.  2017 308 

T.  D.  2163.     Revising  T.  D.  2048 309 

T.  D.  2193.     Revising  T.  D.  2015 310 

T.  D.  2201.     Deductible  bad  debts  311 

T.  D.  2224.     Revising  2201  311 

T.  D.  2231.     Amendments  as  to  fiduciaries 312 

T.  D.  2242.     Aliens,  "residence"  defined 315 

T.  D.  2258.     Banks,  ownership  certificates 316 

T.  D.  2267.     Fiduciaries,  depreciation 317 

T.  D.  2274.     Dividends,  revising  2163 318 

T.  D.  2289.     Revising  2231  319 

PART  V 

Supreme  Court  Opinion  in  Brushaber  v.  Union  Pacific  Railroad. 

(Pages  328-38S.) 

PART  VI 

Forms.    (Pages  340-365.) 

For  individual  returns 355 

For  corporation  return 341 

Instructions  to  corporations 352 

Instructions  to  individuals 365 

Withholding  forms 298 

PART  VII 

Statistics.    (Pages  S69-3S0.) 

Chart  of  statistics Frontispiece 

Receipts  by  States,  all  sources 369 

Receipts  by  years,  all  sources 370 

Corporation  returns 372 

Personal  returns 377 

PART  VIII 

General  Index.    (Page  SSI.) 


INTRODUCTION 

An  eminent  artist  said  that,  to  get  the  full  value  of  his 
work,  it  must  he  viewed  from  the  viewpoint  of  the  artist 
himself.  In  the  same  sense  the  authors  of  this  book  on  the 
Federal  Income  Tax  believe  that  a  careful  consideration  of 
these  introductory  paragraphs  will  prove  beneficial  to  the 
reader  in  his  effort  to  gain  a  comprehensive  understanding  of 
this  complex  and  very  much  misunderstood  law. 

The  motive  of  this  publication  is  in  the  fact  that  there  is 
not  a  treatise  on  the  subject  that  is  intelligible  to  any  one  un- 
acquainted with  legal  phraseology,  and  similarly  there  is  none 
that  is  both  brief  and  complete,  and  which  is  based  on  the 
Supreme  Court  construction  of  the  law;  hence  the  purpose 
of  this  effort  is  to  reduce  the  requirements  of  the  new  law  to 
plain  language  so  that  any  one  by  reading  it  may  clearly 
grasp  it  and  know  his  rights  as  well  as  his  duties  under  the 
law. 

While  fulfilling  this  aim  for  the  general  reader  who  may 
be  liable  for  the  Income  Tax,  we  have  endeavored  at  the 
same  time  to  make  this  work  equally  desirable  and  valuable 
for  the  lawyer.  We  have  tried  to  strike  a  happy  medium  in 
a  book  that  is  so  plain  that  it  cannot  fail  to  be  understood 
and  so  complete  and  accurate  that  nothing  essential  shall  be 
left  out  of  it.  All  the  law  is  given  for  reference,  and,  by  the 
use  of  the  Index  to  the  law  and  the  explanations,  it  is  be- 
lieved that  the  answer  to  any  desired  question  may  be  easily 

vli 


viii  Introduction 

and  quickly  obtained.  All  the  law  and  the  constructions  and 
regulations  are  included  with  the  analysis  in  one  alphabeti- 
cal Index. 

In  developing  these  aims  we  have  not  followed  the  usual 
style  of  law  books.  We  have  tried  to  meet  a  demand,  not  to 
create  one.  In  the  first  part  of  the  work  we  give  the  one- 
page  summary,  by  the  mastery  of  which  the  reader  will  have 
a  general  idea  of  the  law,  and  this  will  aid  him  in  grasping 
the  details.  Next  we  give  our  own  plain  outline  of  the  main 
requirements  of  the  statute  in  brief  paragraphs  that  include 
answers  to  all  the  usual  inquiries  of  persons  interested.  By 
the  cross-index  the  reader  is  referred  to  all  other  parts  of  the 
work.  Following  this  are  the  complete  Statute,  the  Regula- 
tions of  the  Treasury  Department,  the  special  rulings,  the 
Supreme  Court  opinion  in  the  Brushaber  case,  Forms,  Sta- 
tistics and  the  Index. 

The  Statute  and  the  Regulations  are  given  in  full,  and 
without  accompanying  comment.  The  Regulations  by  the 
Commissioner  of  Internal  Revenue  cover  the  closest  details 
and  are  secondary  in  importance  only  to  the  Statute  itself. 
They  contain  all  the  regulations  made  by  the  Department  for 
the  current  year  in  which  this  book  goes  to  press. 

The  reader  who  undertakes  to  gain  a  general  knowledge  of 
the  new  law  is  advised  to  read  the  book  in  the  order  in  which 
it  is  given.  When  an  answer  to  a  particular  question,  how- 
ever, is  needed,  the  proper  method  is  to  consult  the  Table  of 
Contents  and  then,  if  necessary,  the  Index.     Both  the  Table 


Introduction  ix 

of  Contents  and  the  Index  have  been  made  as  complete  as 
possible,  and  under  the  name  of  the  subject  indicated  the 
searcher  will  find  his  references  to  that  point  in  every  part 
of  the  book,  including  the  authors'  explanation,  the  forms, 
the  Statute,  the  Regulations  and  the  Statistics.  On  account 
of  this  feature  of  the  Index,  we  have  not  cumbered  the  ex- 
planatory paragraphs  with  numerous  citations  of  authori- 
ties, but  give  only  such  references  to  cases  and  other  works 
as  may  be  really  useful.  The  case  of  Brushaber  v.  Union 
Pacific  Railroad  (If  13)  practically  covers  all  the  Statute. 

From  the  Report  of  the  Commissioner  of  Internal  Revenue 
for  the  fiscal  year  ending  June  30,  1915,  it  is  made  plain  that 
the  administration  of  the  new  law  has  been  effective  and  that 
only  minor  changes  are  contemplated  in  the  near  future.  One 
of  these  is  that  all  persons  having  "gross"  incomes  of  $3,000 
or  more  be  required  to  list  the  incomes.  At  present  the  re- 
quirement is  for  "net"  incomes,  so  that  the  individual  with 
an  income  near  $3,000  is  practically  left  to  be  his  own  judge 
as  to  whether  or  not  his  "net"  income  is  up  to  the  required 
amount.  A  second  probable  amendment  is  to  require  part- 
nerships to  list  the  partnership  income  as  now  required  of 
corporations,  instead  of  the  present  arrangement,  which  only 
requires  the  partners  to  list  their  own  proportionate  parts  of 
the  income. 

The  present  law  requires  the  return  of  the  income  to  be 
made  in  the  district  where  the  taxpayer's  principal  place  of 
business  is  located,  and  it  is  proposed  that  this  be  changed 


x  Introduction 

so  that  the  return  shall  be  made  in  the  district  of  the  legal 
residence  of  the  taxpayer.  These,  and  other  suggestions  con- 
cerned with  the  administration  of  the  law,  are  the  only  prob- 
able changes  contemplated  except  such  as  may  arise  for  the 
purpose  of  increasing  revenue.  For  this  latter  purpose  it  is 
proposed  that  the  $3,000  limit  be  lowered  so  as  to  include  net 
incomes  exceeding  $1,000,  and  between  this  idea  and  the  op- 
posing one  of  placing  a  heavier  additional  tax  on  the  great 
incomes,  will  be  fought  out  the  future  battles  in  connection 
with  the  Income  Tax. 

Because  of  the  changes  that  will  likely  be  made  during 
the  ensuing  year,  a  concise  supplement  to  this  work  will  be 
published  soon  after  the  amendments  are  enacted,  which  will 
probably  be  on  or  about  the  first  day  of  1917.  As  these  new 
amendments,  whatever  they  are,  will  affect  only  the  taxes  for 
1917,  this  supplement  will  be  all  that  is  needed  for  additional 
information  for  the  year  1917,   and  doubtless  for  several 

years  thereafter.  „  ^  „,.,„,„ 

J  Beuce  Craven,  Trinity,  N.  C. 

R.  O.  Eveeett,    Durham,  N.  C. 
February  10,  1916. 


ABBREVIATIONS 

(Used  in  Cross  References,  Index,  etc.) 

H  refers  always  to  the  paragraphs  in  the  Analysis  or  first 
part  of  this  book.    Tf42  signifies  paragraph  42  of  the  Analysis. 

Int.,  Introduction. 

T.  R.,  Treasury  Regulations,  articles  1-199,  Part  III. 

T.  D.,  Treasury  Department  special  rulings,  Part  IV. 

St.,  Statute,  Part  II. 

"Statute"  refers  always  to  the  complete  Federal  Income 
Tax  Law,  now  in  force,  enacted  October  3,  1913,  and  given 
in  full  in  Part  II. 

"Analysis"  refers  always  to  the  58  paragraphs  in  the  first 
part  of  this  hook. 

"R.  S."  refers  to  the  Revised  Statutes  of  the  United  States. 

"Sup.  Ct"  refers  to  the  Supreme  Court  opinion  in  the 
Brushaber  case,  Part  V. 


xi 


SUMMARY 

The  Federal  Income  Tax  was  enacted  by  the  Congress  of 
the  United  States  and  signed  by  the  President,  October  3, 
1913. 

The  new  law  has  been  fully  upheld  by  the  Supreme  Court 
of  the  United  States,  construing  the  Sixteenth  Amendment. 

(1113.)  _ 

The  income  on  which  the  taxation  is  based  is  the  income 
since  March  1,  1913.    (If  13.) 

The  calendar  year  is  the  basis  for  determining  the  income, 
except  for  certain  corporations  whose  fiscal  year  ends  at  some 
other  time.     (1137.) 

The  return  for  all  individuals  must  be  made  on  or  before 
the  first  day  of  March  of  each  year,  this  return  being  of  the 
amount  of  income  for  the  previous  calendar  year  ending  De- 
cember 31.     (1f37.) 

Every  individual  21  years  of  age,  whose  net  income  for 
any  calendar  year  exceeds  $3,000,  must  list  the  income  for 
taxation  on  or  before  the  first  day  of  the  following  March. 

Unmarried  persons  pay  the  "normal  tax"  on  the  amount 
by  which  the  net  income  exceeds  $3,000,  and  married  persons 
pay  only  on  the  excess  above  $4,000.    (1f58.) 

Every  corporation  conducted  for  private  gain  must  make 
a  return  of  the  income,  and  must  pay  the  "normal  tax"  on  all 
of  the  net  income.     (1115.) 

"Net  income"  means  the  income  above  the  expenses  of  con- 
ducting business,  but  this  "expense"  does  not  include  per- 
sonal or  family  expenses.     (1120.) 

The  income  from  Government  bonds  and  from  salaries  of 
State  officers  are  exempt  from  taxation  under  the  present 
statute.     (If  19.) 

The  "normal  tax"  is  a  tax  of  1  per  centum  on  net  income. 
The  "additional  tax,"  ranging  from  1  to  4  per  centum,  is 
on  incomes  exceeding  $20,000,  but  this  additional  tax  does 
not  apply  to  Corporations.    (1fl6.) 


xil 


PART  I 


ANALYSIS 


Discussion  of  the  Income  Tax  law  in  paragraphs  from  1 
to  58,  inclusive,  with  cross  references  to  other  parte  of  the 
work. 


*t 


ANALYSIS 

Tfl.  Necessity  for  Taxation.  The  foundation  reason  for 
public  taxation  is  the  general  convenience.  Certain  things 
become  essential  for  the  public  good,  and  it  is,  in  any  large 
group  of  people,  a  practical  impossibility  to  raise  the  amount 
by  toll  or  personal  voluntary  contributions,  or  even  by  gen- 
eral or  unanimous  consent.  Hence  arose  the  governmental 
policy  of  enforced  taxation.  The  governing  power  decides 
what  expense  is  necessary  for  the  public  welfare,  and  raises 
the  required  revenue  by  a  levy  or  tax  on  all  the  people.  The 
only  alternative  or  substitute  for  it  would  be  the  method  by 
which  two  or  three  persons  contribute  to  the  expense  of  some 
undertaking  for  their  mutual  benefit,  and,  as  total  equality 
could  never  be  possible,  this  system  in  any  nation  cannot  be 
feasible.  Hence  the  expense  is  undertaken  on  the  theory  of 
the  greatest  good  to  the  greatest  number,  and  all  are  forced 
to  contribute  to  it.  "A  sum  or  rate  imposed  by  governmental 
authority  for  a  public  object  or  purpose."  Pettibone  v.  Smith, 
150  Pa.  118,  17  L.  R.  A.  423. 

1f2.  Income  Tax  Theory.  There  are  two  general  theories 
of  taxation,  in  one  or  the  other  of  which  all  schemes  of  taxa- 
tion are  included.  One  is  the  cost  to  the  Government  of  the 
benefits  conferred  upon  the  taxpayer,  or,  in  other  words,  the 
taxpayer  pays  according  to  the  protection  afforded  him,  bas- 
ing the  amount  on  the  actual  cost  to  the  Government.  In  this 
class  comes  the  property  tax,  which  each  person  pays  accord- 
ing to  the  amount  of  property  he  owns.  The  other  theory, 
under  which  comes  the  Income  Tax,  is  that  the  taxpayer  en- 
joys his  benefits  and  opportunities  by  governmental  protec- 
tion, and  therefore  should  pay  according  to  his  ability  to  pay. 
It  is  argued  that  a  man  who  has  income  from  the  manage- 
ment of  his  property,  as,  for  instance,  a  merchant,  should  not 
be  liable  for  tax  any  more  than  the  professional  man  whom  by 
fees  or  tuition  the  merchant  helps  to  support  and  whose  in- 
come is  not  connected  with  care  of  property  and  its  dangers 
and  losses.     As  a  further  corollary  to  this,  it  is  contended 


4  Federal  Income  Tax 

that  the  income  from  a  professional  man's  labors  should 
not  be  taxed  as  high  as  the  income  from  his  or  another's 
vested  property,  and  this  principle  is  part  of  the  Income  Tax 
system  of  England  where  "earned"  income  has  rights  over 
"unearned"  income.  "The  power  of  taxation  is  exercised 
upon  the  assumption  of  an  equivalent  rendered  to  the  tax- 
payer in  the  protection  of  his  person  and  property."  Transit 
Co.  v.  Kentucky,  199  U.  S.  202.  To  this  is  now  added  the 
extension  that  the  taxation  may  also  consider  the  special  cir- 
cumstances by  which  one  man's  income  is  greater  than  an- 
other man's,  though  the  amount  of  their  property  may  be  the 
same.     See  IflO  and  1fl3. 

1f3.  First  Taxes  Were  Income  Taxes.  When  the  wander- 
ing tribes,  before  the  days  of  established  governments  and 
fixed  boundaries,  faced  the  necessity  of  compelling  recalci- 
trants to  assume  their  proportional  parts  of  the  general  ex- 
pense, taxation  became  necessary,  and  the  first  tax  levied  was 
a  tax  according  to  ability  to  pay,  or  an  Income  tax.  It  was 
the  policy  of  the  ancient  kings  to  take  from  their  subjects 
according  to  their  ability  to  contribute,  and  on  the  same 
theory  was  based  the  biblical  taking  of  a  tenth  of  the  income 
to  the  Church,  which  was  then  also  the  Government. 

For  the  complete  History  of  Income  Tax  Laws,  refer  to 
Foster's  "Income  Tax,"  1915. 

If4.  Income  Taxes  in  Europe.  In  all  European  countries 
the  Income  Tax  has  afforded  an  irregular  source  of  income 
as  far  back  as  history  goes.  To  give  the  account  of  it  would 
fill  a  volume  with  the  simple  record.  In  England,  what 
might  be  called  the  modern  tax  was  first  begun  in  1799.  It 
was  amended  and  modified  often  until  1853,  when  the  act 
which  is  chapter  34  of  the  16th  and  17th  Victorian  Statutes 
may  be  said  to  have  found  a  permanent  basis.  The  present 
English  act,  7  Edward  VII.,  chapter  13  (August  9,  1907), 
taxes  all  incomes  in  excess  of  150  pounds,  or  our  approximate 
equivalent  of  $750.  The  present  tax  on  the  lowest  income  is 
in  excess  of  a  shilling  on  a  pound,  or  approximately  in  our 
money  of  four  cents  on  the  dollar  above  $750,  with  additional 


# 


Analysis  5 

taxes  on  larger  incomes  to  the  extent  that  of  the  highest  in- 
comes the  English  tax  now  takes  about  40  per  cent.  In  Eng- 
land the  Income  Tax  affords  the  chief  source  of  revenue.  In 
France,  Germany,  and  other  nations  it  is  also  an  important 
part  of  the  revenue  system. 

1f5.  State  Income  Taxation.  From  the  early  days  of  the 
Plymouth  Colony  to  the  present  there  have  been  numerous 
and  sundry  experiments  with  the  Income  Tax,  in  the  Colonies 
first,  and  later  in  many  of  the  States  of  the  American  Union. 
The  tax,  in  one  form  or  another,  has  existed  in  Massachusetts 
since  1646,  but  has  produced  but  little  revenue  and  is  hardly 
worthy  of  the  name  of  a  tax.  (Wilcox  v.  Middlesex  County 
Commissioners,  103  Mass.  544.)  In  Virginia  the  tax  has 
existed  since  1898  and  has  produced  more  income  there  than 
any  other  State  tax.  The  other  States  where  the  tax  is  now 
in  force  as  a  part  of  the  State  revenue  laws  are  South  Caro- 
lina, Wisconsin,  Tennessee,  North  Carolina,  and  Oklahoma. 
It  is  also  in  effect  in  Hawaii  and  has  been  in  the  Philippine 
Islands,  but  was  repealed  there  in  1904  ;  and  it  has  been  tried 
in  different  forms  and  at  various  times  in  a  number  of  other 
States.  The  new  law  applies,  of  course,  to  Hawaii  and  the 
Philippines.  (St.  M.)  The  constitutions  of  Virginia,  North 
Carolina,  Texas,  California,  and  Tennessee  expressly  author- 
ize a  tax  on  incomes,  though  in  Tennessee  and  North  Caro- 
lina it  can  only  affect  incomes  from  other  sources  than  from 
property  which  is  taxed.  The  Congress  of  the  Confederate 
States  of  America  (April  24,  1863)  imposed  an  Income  Tax 
on  incomes  exceeding  $500,  and  at  a  rate  increasing  to  15 
per  cent,  and  this  was  later  raised  to  25  per  cent.  It  applied 
to  individuals,  corporations,  and  joint  stock  companies. 

If6.  Constitutional  Provisions.  The  sections  of  the  Con- 
stitution bearing  upon  the  subject  of  the  Income  Tax,  the 
combined  meaning  of  which  could  never  be  settled  until  the 
enactment  of  the  Sixteenth  Amendment,  are  as  follows : 

9th  Amendment:  The  enumeration  in  the  Constitution,  of  certain 
rights,  shall  not  be  construed  to  deny  or  disparage  others  retained 
by  the  people.  Spies  v.  Illinois,  123  U.  S.  131;  Jack  v.  Kansas,  199 
U.  S.  372. 


6  Federal  Income  Tax 

10th  Amendment:  The  powers  not  delegated  to  the  United  States 
by  the  Constitution,  nor  prohibited  by  it  to  the  States,  are  reserved 
to  the  States  respectively,  or  to  the  people.  Curtvn  v.  Benson,  22 
U.  S.  78;  Interstate  Commerce  Com.  v.  Transit  Co.,  224  U.  S.  194. 

Article  I,  section  2:  Representatives  and  direct  taxes  shall  be 
apportioned  among  the  several  States  which  may  be  included  within 
this  Union,  according  to  their  respective  numbers     *     *     *     . 

Article  I,  section  8:  'Ihe  Congress  shall  have  power  to  lay  and 
collect  taxes,  duties,  imposts  and  excises,  to  pay  the  debts  and  pro- 
vide for  the  common  defense  and  general  welfare  of  the  United 
States;  but  all  duties,  imposts  and  excises  shall  be  uniform  through- 
out the  United  States.  Hooe  v.  United  States,  218  U.  S.  322;  Flint  v. 
Tracy  Co.,  220  U.  S.  107. 

Article  I,  section  9:  No  capitation,  or  other  direct,  tax  shall  be 
laid,  unless  in  proportion  to  the  census  or  enumeration  hereinbefore 
directed  to  be  taken.  Spreckles  Co.  v.  McClain,  192  U.  S.  397 ;  South 
Carolina  v.  United,  States,  199  U.  S.  437. 

See  1112  for  16th  Amendment;  T|10  for  Pollock  case;  1113 
for  Brushaber  case,  which  in  full,  in  Part  V,  construes  all 
these  provisions. 

1f7.     Direct  and  Indirect  Taxation.     Section  9  of  Article 

1  of  the  Constitution,  which  was  one  of  the  sections  protect- 
ing the  States  on  an  equal  hasis,  declares  that  no  direct  tax 
shall  be  laid  unless  in  proportion  to  population,  and  section 

2  of  the  same  article  has  practically  the  same  provision. 
Direct  tax  is  tax  directed  at  an  individual  or  corporation,  in- 
cluding capitation  or  "poll"  tax,  property  taxes,  taxes  on 
business,  incomes,  etc.  Indirect  taxation  is  that  imposed  by 
what  is  commonly  known  as  the  tariff  on  goods  imported 
into  the  country,  and  which  is  a  tax  on  the  goods,  and  not 
on  a  person.  All  internal  revenue  paid  by  individuals  was 
indirect  taxation  until  the  passage  of  the  Sixteenth  Amend- 
ment. (Cooley  on  Taxation.)  According  to  the  Pollock 
case,  hereinafter  discussed,  there  is  no  tax  outside  of  direct 
taxation  on  the  one  side,  and  "duties,  imposts  and  excises" 
on  the  other.  Under  this  definition  Congress  could  only  levy 
tariffs  on  imports,  taxes  on  business,  like  tobacco  and  liquor 
manufactures ;  and  all  other  taxes  levied  by  Congress  must 
be  apportioned  equally  among  the  States.    Hence  a  capitation 


Analysis  7 

tax  or  any  other  direct  tax  was  an  impossibility  to  Congress 
until  the  new  amendment  expressly  conferred  the  power  with 
regard  to  incomes.  As  to  whether  or  not  the  income  tax  was 
a  direct  tax  was  the  problem  upon  which  the  division  came 
that  forced  the  amendment. 

"The  distinction  between  direct  and  indirect  taxation  was  well 
understood  by  the  framers  of  the  Constitution  and  those  who  adopted 
it.  Under  the  State  systems  of  taxation  all  taxes  on  real  estate  or 
personal  property  or  the  rents  or  income  thereof  were  regarded  as 
direct  taxes.  The  rules  of  apportionment  and  uniformity  were 
adopted  in  view  of  that  distinction  and  those  systems."  Chief  Justice 
Fuller,  Pollock  v.  Trust  Co.,  157  U.  S.  573. 

See  Brushaber  case,  1fl3. 

1f8.  First  National  Laivs.  A  Federal  Income  Tax  was 
recommended  by  the  Secretary  of  the  Treasury  in  1812,  but 
not  enacted.  By  act  of  August  5,  1861,  a  tax  of  3  per  centum 
was  imposed  on  all  incomes  in  excess  of  $800,  but  this  was 
repealed  by  the  act  of  July  1,  1862,  which  in  turn  laid  the  3 
per  centum  tax  on  all  incomes  between  $600  and  $10,000, 
and  5  per  centum  on  the  excess  above  $10,000.  June  30, 
1864,  the  rate  was  increased  to  5  per  centum  between  $600 
and  $5,000,  74,  per  centum  between  $5,000  and  $10,000,  and 
10  per  centum  on  all  over  $10,000.  March  3,  1865,  the  rate 
above  $5,000  was  fixed  at  10  per  cent.  March  2,  1867,  the 
tax  was  fixed  at  5  per  cent  above  $1,000.  The  rate  was 
cut  in  half  July  14,  1870,  and  the  entire  law  expired  by  limi- 
tation the  following  year.  During  all  this  time  the  constitu- 
tionality of  the  law  was  not  questioned,  though  it  may  be 
assumed  that  this  fact  was  partly  due  to  the  stre?s  of  war. 
For  further  history  of  income  taxes  in  general,  see  Foster's 
"Income  Tax."  National  Bank  v.  United  States,  101  U.  S. 
1 ;  Springer  v.  United  States,  102  U.  S.  5S6.     See  If  13. 

119.  The  Act  of  1894.  August  28,  1894,  Congress  again 
enacted  an  Income  Tax,  this  levying  a  tax  of  2  per  centum  on 
all  incomes  exceeding  $4,000  a  year.  This  act  was  amended 
as  to  time  of  filing  returns,  February  19,  1895.  The  first 
tax  under  the  act  was  due  to  be  paid  on  or  before  July  1, 


8  Federal  Income  Tax 

1895,  but  before  tbat  limit  was  reacbed  tbe  act  bad  been  de- 
clared unconstitutional.  (See  1113.)  28  St.  at  L.  509,  3 
Fed.  St.  Ann.  622,  28  St.  at  L.  971,  Pollock  v.  Farmers  Loan 
and  Trust  Co.,  157  U.  S.  429,  158  U.  S.  601. 

1(10.  The  Pollock  Case.  It  is  possible  tbat  tbere  would 
have  been  no  attack  on  tbe  constitutionality  of  tbe  act  of 
1894  except  for  tbe  exemption  of  incomes  of  less  tban 
$4,000,  the  previous  exemption  having  been  only  $600.  Be- 
cause of  this  radical  change,  four-fifths  of  the  tax  under  the 
act  would  have  been  paid  by  the  States  of  Pennsylvania,  New 
York,  New  Jersey,  and  Massachusetts.  The  statute  made 
it  impossible  for  an  injunction  to  be  granted  against  the  tax 
collector  (Rev.  St.  3224),  and  by  any  of  the  usual  methods 
of  bringing  suit  the  final  decision  would  have  been  delayed 
until  many  millions  of  dollars  had  been  paid  in  tax.  Hence 
it  was  tbat  Pollock,  a  private  citizen,  as  a  stockholder  in  the 
Farmers  Loan  and  Trust  Company,  petitioned  the  courts  to 
enjoin  the  company  from  paying  tbe  tax.  By  mutual  con- 
sent tbe  case  was  hurried  to  tbe  final  decision.  Chief  Justice 
Fuller,  for  a  divided  court,  decided  that  the  tax  on  income 
from  real  estate  was  a  direct  tax,  and  hence  tbe  act  taxing 
income  from  real  estate  was  unconstitutional.  In  his  opinion 
he  recalled  the  careful  guarding  of  the  rights  of  the  wealthier 
States  by  the  makers  of  the  Constitution  and  was  plainly 
influenced  by  the  consideration  that  the  act  would  levy  heav- 
ily on  a  few  States  and  almost  none  at  all  on  others.  (Pollock 
v.  Loan  and  Trust  Co.,  157  U.  S.  429.)  Both  sides  were  dis- 
satisfied with  this  decision  and  asked  for  a  rehearing,  and, 
in  the  second  opinion,  the  Court  again  divided,  it  was  held 
that  the  tax  on  income  from  personal  property  was  also  direct 
taxation,  and  hence  the  entire  act  was  unconstitutional.  Pol- 
lock v.  Trust  Co.,  158  U.  S.  601.  See  If  13  for  synopsis  of 
the  Brushaber  case,  and  see  opinion  in  full  in  Part  V  of  this 
volume. 

Ifll.  Corporation  Excise  Tax  of  1909.  By  the  Act  of 
August  5,  1909,  there  was  imposed  a  tax  of  1  per  centum 
on  incomes  in  excess  of  $5,000  of  all  corporations  other  than 


Analysis  9 

partnerships.  This  tax  as  enacted  is  "a  special  excise  tax 
with  respect  to  the  carrying  on  or  doing  business  by  such  cor- 
poration," etc.  36  St.  at  L.,  ch.  6,  page  112.  This  act  was 
held  to  be  constitutional,  but  comes  under  the  name  of  excise 
tax  and  is  not  an  income  tax,  though  the  tax  is  based  on  the 
amount  of  income.  Flint  v.  Stone  Tracy  Company,  220 
U.  S.  107.  This  Excise  Tax  Law  was  repealed  by  the  present 
Income  Tax  Law.  The  normal  tax  on  corporations  of  the 
new  law  (section  G-a)  takes  the  place  of  the  old  excise  tax. 
Section  S,  at  the  end  of  the  Statute  in  this  book,  provides  for 
the  collection  of  the  tax  to  March  1,  1913,  when  the  new  tax 
became  effective.  For  all  purposes,  the  present  income  tax 
on  corporations  (Hi 5)  is  substantially  the  same  as  the  excise 
tax  of  1909,  except  that  the  excise  tax  exempted  $5,000  and 
the  Income  Tax  of  1913  does  not. 

If  12.  Sixteenth  Amendment.  The  constitutional  amend- 
ment expressly  authorizing  a  Federal  Income  Tax  is  in  the 
following  words :  "The  Congress  shall  have  power  to  lay  and 
collect  taxes  on  incomes,  from  whatever  source  derived,  with- 
out apportioning  among  the  several  States,  and  without  re- 
gard to  any  census  or  enumeration." 

Notwithstanding  the  unrestricted  power  the  Act  of  1913 
does  not  tax  the  income  from  salaries  of  State  officers,  nor 
from  bonds  of  a  State  or  any  political  subdivision  thereof, 
these  exemptions  being  in  deference  to  the  previous  opinions 
of  the  Supreme  Court  that  such  income  could  not  be  taxed. 

The  Sixteenth  Amendment  was  proposed  to  the  legislatures 
of  the  forty-eight  States  by  the  Sixty-first  Congress,  on  the 
12th  day  of  July,  1909.  The  Secretary  of  State,  in  a  proc- 
lamation dated  February  25,  1913,  declared  the  amendment 
to  be  a  part  of  the  Constitution,  having  been  ratified  by 
thirty-eight  of  the  forty-eight  States.  Only  three  States  actu- 
ally rejected  the  amendment,  these  being  New  Hampshire, 
Ehode  Island  and  Utah.  It  was  apparent  from  the  ratifica- 
tions that  the  objection  upon  which  the  Act  of  1894  was  de- 
clared unconstitutional  was  more  of  a  theory  than  a  fact.  The 
basis  of  that  objection  was  that  the  States  of  New  York,  New 


10  Federal  Income  Tax 

Jersey,  Massachusetts  and  Pennsylvania,  being  the  wealthi- 
est, would  be  discriminated  against.  Of  these  States,  all  ex- 
cept Pennsylvania  ratified  the  amendment,  and  Pennsyl- 
vania did  not  act  on  it.  Illinois,  which  was  third  in  the 
amount  of  tax  paid  in  the  first  year  of  the  operation  of  the 
law,  was  the  fourth  State  to  ratify  the  amendment.  (See 
U.  S.  Senate  Constitutional  Manual,  1913.)  See  If  13  and 
Brushaber  case  in  full  in  Part  V,  construing  the  Sixteenth 
Amendment. 

1fl3.  Constitutionality  of  New  Law.  The  present  In- 
come Tax  law  was  declared  constitutional  in  a  comprehensive 
opinion  by  the  Supreme  Court  of  the  United  States,  Janu- 
ary 24,  1916,  in  the  case  of  Brushaber  v.  Union  Pacific  Bail- 
road,  given  in  full  herein  as  Part  V.  The  opinion  of  the 
Court  was  unanimous,  but  Justice  McReynolds  took  no  part 
in  it  because  of  his  activity  in  connection  with  the  subject 
when  he  was  Attorney-General.  Chief  Justice  White  wrote 
the  opinion  for  the  Court,  and  in  every  point  the  validity  of 
the  statute  was  upheld.  The  case  was  exactly  similar  in  its 
inception  to  the  Pollock  case  (flO).  A  private  stockholder 
brought  an  action  against  the  railroad  company  to  restrain 
it  from  paying  the  tax  on  the  ground  that  it  was  unconstitu- 
tional. The  Court  sustains  the  ruling  in  the  Pollock  case  that 
the  income  tax  is  a  direct  tax,  and,  therefore,  previous  to  the 
Sixteenth  Amendment  (1112),  it  could  not  be  valid  without 
being  apportioned  out  among  the  States.  The  basic  error  of 
the  attack  on  the  law,  according  to  the  Court,  was  in  assum- 
ing that  the  Sixteenth  Amendment  conferred  the  power  to 
levy  an  income  tax,  whereas  the  power  had  always  existed, 
and  "the  whole  purpose  of  the  amendment  was  to  relieve  all 
income  taxes  from  a  consideration  of  the  source  whence  the 
income  was  derived."  As  to  the  "uniformity"  required  by 
section  8  of  Article  I  of  the  Constitution,  the  Court  holds 
that  this  means  merely  that  the  law  must  be  the  same  in  all 
the  States,  and  nothing  more  than  this.  The  principal  detail 
argued  to  the  Court  was  the  withholding  provision  requiring 
banks,  etc.,  at  their  own  expense  to  withhold  and  pay  tax,  and 


Analysis  11 

the  Court  upheld  this  as  not  violating  the  "due  process  of 
law."  The  Court  declared  valid  the  retroactive  provision 
making  the  tax  date  from  March  1,  1913,  though  the  law  was 
enacted  October  3,  1913 ;  there  being  nothing  in  the  Consti- 
tution prohibiting  retroactive  taxation,  and  it  not  being  in 
violation  of  the  "due  process"  clause  of  the  Fifth  Amend- 
ment. Exemption  of  labor  and  agricultural  organizations 
(1115)  was  upheld.  Limitation  of  the  amount  of  interest 
allowed  to  be  deducted  by  a  corporation  (1122),  deduction  of 
income  from  dividends  by  individuals,  but  not  by  corpora- 
tions (149),  denial  of  a  "second  exemption"  for  additional 
tax  (1(16),  difference  in  specific  exemption  for  husband  and 
wife  when  not  living  together  (1f52),  denial  of  deduction  for 
rent  (H48),  and  distinction  between  farmers  and  others  with 
regard  to  personal  and  family  expenses  (1[21,  51)  were  the 
chief  other  points  declared  valid  by  the  Court.  See  Constitu- 
tional Provisions  (K6)  and  Excise  Law  (111).  For  details 
in  the  Brushaber  case,  see  references  in  the  General  Index  of 
this  book,  preceded  by  "Sup.  Ct." 

1114.  The  Act  of  October  3,  WIS.  This  law,  signed  by 
the  President,  October  3,  1913,  is  the  subject  of  this  book, 
and  the  various  provisions  of  it  will  be  explained  in  subse- 
quent paragraphs.  The  complete  statute,  which  is  section  2 
of  the  Tariff  act  of  1913,  is  given  elsewhere  in  this  volume, 
together  with  the  Treasury  Department  rulings  concerning 
the  operation  of  it,  and  the  Supreme  Court  construction  of  it. 
(1(13.)  The  bill  was  passed  by  the  House  of  Representa- 
tives May  8,  by  a  vote  of  281  to  139,  and  by  the  Senate,  Sep- 
tember 9,  by  a  vote  of  44  to  37.  It  was  then  sent  to  confer- 
ence regarding  minor  disagreements  between  the  two  houses, 
and  was  finally  adopted  in  the  Senate  October  2,  and  in  the 
House  October  3,  and  the  President  signed  it  October  3. 
The  bill  was  carefully  drawn  to  meet  all  constitutional  objec- 
tions, and  is  held  to  be  entirely  valid  in  the  Brushaber  case 
given  in  full  in  Part  V  of  this  work.  (See  1113.)  The  total 
receipts  under  the  law  in  1914  (for  the  last  ten  months  of 
1913)  were  $71,381,274.69.     For  the  full  year  of  1914,  the 


12  Fedebal  Income  Tax 

taxes  for  which  were  collected  in  1915,  the  total  receipts  were 
$79,999,834.25.    See  Statistics  in  last  part  of  this  volume. 

1)15.  Corporation  Income  Tax.  Every  corporation, 
joint-stock  company,  insurance  company  or  association,  not 
including  partnerships,  doing  business  for  private  gain  in 
the  United  States,  shall  make  a  return  of  the  income  for  each 
year,  and  is  required  to  pay  a  tax  of  1  per  centum  on  all  the 
net  income,  however  small  it  may  be.  (T.  R.  163.)  There 
is  no  additional  tax  on  corporations,  but  the  1  per  centum 
on  the  entire  net  income,  known  as  the  normal  tax,  is  the  ex- 
tent of  the  corporation  income  tax ;  but  see  Dividends,  1f49. 
If  the  corporation  is  a  foreign  one  the  tax  is  based  only  on 
the  income  accruing  from  business  in  the  United  States.  The 
law  does  not  apply  to  labor,  agricultural,  or  horticultural  or- 
ganizations (T.  D.  2090,  page  18,  and  T.  D.  1996)  or  to 
mutual  savings  banks  not  having  capital  stock  represented  bv 
shares,  nor  to  fraternal  beneficiary  societies  operating  under 
the  lodge  system,  nor  to  domestic  building  and  loan  associa- 
tions, nor  to  cemetery  companies  operated  not  for  gain,  nor 
to  corporations  or  organizations  operated  for  religious,  scien- 
tific, charitable,  or  educational  purposes,  nor  to  business 
leagues,  boards  of  trade,  chambers  of  commerce,  civic  leagues, 
etc.,  which  are  not  operated  for  profit  or  for  the  benefit  of 
any  private  stockholders.  (T.  D.  1967.)  In  brief,  the  tax 
applies  only  to  corporations  conducted  for  the  profit  of  the 
private  stockholders  and  not  for  public  good.  (T.  R.  87.) 
The  tax  does  not  apply  to  income  from  any  public  utility 
operated  wholly  or  in  part  by  the  State  or  any  municipality, 
etc.,  in  such  a  way  that  the  tax  would  fall  as  a  burden  on  the 
Government.  (See  in  full  section  G  a  of  the  Statute.)  Cor- 
poration Bookkeeping,  1f57.  Forms  and  Instructions  in  last 
part  of  this  book.  Corporation  fiscal  year,  1137,  and  T.  D. 
2029.)  Treasury  Regulations,  Articles  76-186,  and  T.  D. 
2152,  pages  2-6.  For  Corporation  deductions,  see  T.  R.  113. 
Bonds  guaranteed  tax-free,  T.  D.  1948. 

Hi  6.     Rate  of  the  Individual  Tax.     The  rate  of  taxation 
on  the  income  of  individuals  is  1  per  centum  (known  as  the 


Analysis  13 

normal  tax)  on  the  income  above  $3,000,  if  unmarried,  and 
above  $4,000  if  married  (1158).  Every  individual  whose  net 
income  exceeds  $3,000  in  any  calendar  year  must  make  a  re- 
turn of  his  income  to  the  collector  of  his  district  before  March 
1  of  the  succeeding  year.  The  normal  tax  of  1  per  centum 
is  on  the  income  above  the  $3,000  or  $4,000  and  up  to  $20,- 
000.  On  the  income  from  $20,000  to  $50,000  the  tax  is  2 
per  centum.  Between  $50,000  and  $75,000  it  is  3  per  cen- 
tum. From  $75,000  to  $100,000  it  is  4  per  centum.  Be- 
tween $100,000  and  $250,000  it  is  5  per  centum.  From 
$250,000  and  $500,000  it  is  6  per  centum  and  7  per  centum 
on  the  excess  above  $500,000.  To  apply  the  tax  on  an  in- 
come of  a  million  dollars  will  serve  to  make  the  requirement 
plain.  On  the  first  $20,000  the  tax  is  1  per  centum  above 
$4,000,  or  $160.  On  the  next  $30,000  it  is  2  per  centum,  or 
$600.  On  the  next  $25,000  it  is  3  per  centum,  or  $750.  On 
the  next  $25,000  it  is  4  per  centum,  or  $1,000.  On  the  next 
$150,000  it  is  5  per  centum,  or  $7,500.  On  the  next  $250,- 
000  it  is  6  per  centum  or  $15,000.  On  the  next  $500,000 
it  is  7  per  centum,  or  $35,000.  This  makes  the  total  income 
tax  on  a  net  income  of  a  million  dollars  amount  to  $60,010. 
See  first  and  second  paragraphs  of  the  Statute.  T.  R.  1 
and  2. 

1fl7.  Who  Must  Make  Returns  of  Income.  Every  cor- 
poration conducted  for  private  gain  must  report  the  income 
regardless  of  the  amount.  (1|15.)  Every  individual  who  is 
as  much  as  21  years  of  age  and  whose  net  income  is  more  than 
$3,000,  must  make  the  return.  (T.  R.  15-18.)  Every  fidu- 
ciary, guardian,  trustee,  etc.,  who  is  entrusted  with  the  man- 
agement of  the  funds  of  another  whose  income  amounts  to 
more  than  $3,000  must  make  the  return  of  the  income. 
(1133.)  In  this  income  is  not  to  be  included  any  income 
from  dividends  of  corporations  which  also  pay  the  tax. 
(H49.)  In  no  case  is  any  return  required  from  an  individual 
where  the  net  income  does  not  exceed  $3,000.  (St.  D.) 
Time  and  place  for  making  returns,  1137.  There  are  five 
different  forms  for  income  returns,  these  being  for  individ- 


14  Federal  Income  Tax 

uals,  fiduciaries,  withholding  agents,  corporations  other  than 
insurance  companies,  and  insurance  companies.  See  indi- 
vidual and  corporation  forms  herein.  Corporations,  ][15. 
Insurance  Companies,  143.  Eeturns  generally,  153.  Fidu- 
ciaries, 133.  Withholding  agents,  1(32.  Mutual  Telephone 
Companies,  etc.,  T.  D.  1933.  Exempt  corporations,  T.  E. 
87,  and  T.  D.  2090  "exempt." 

If  18.  Gross  Income  Defined.  The  tax  is  based  on  net  in- 
come, but  every  person  who  makes  a  return  of  his  income 
must  list  his  gross  income,  and  gross  income  includes  all  in- 
come, gains  and  profits  from  all  sources  whatever  in  the  cal- 
endar year  for  which  the  return  is  made  (T.  E.  4),  except  as 
mentioned  in  the  succeeding  paragraph,  and  does  specifically 
include  all  of  the  following:  salaries  and  wages  (131),  com- 
pensation for  personal  services  in  whatever  form  paid,  pro- 
fessions (1147),  vocations,  business  (whether  the  profits  are 
actually  divided  or  not,  as  in  partnerships)  (136),  trade,  com- 
merce, sales,  dealings  in  personal  or  real  property  (1(50),  in- 
terest, rents  (1148),  dividends  (149),  or  from  any  business  or 
transaction  for  gain,  including  the  income  from,  but  not  the 
value  of  the  property  obtained  by  gift,  bequest,  devise  or  de- 
scent (129).  Insurance  companies'  gross  income,  T.  E.  97- 
102.  Manufacturing  company,  T.  E.  104.  Mercantile  cor- 
poration, T.  E.  105.  Miscellaneous  corporations,  T.  E.  106. 
Mutual  fire  insurance  company,  T.  E.  108.  General  defi- 
nition gross  income,  T.  E.  107. 

1J19.  Nontaxable  Gross  Income.  The  following  are  not 
to  be  considered  as  a  part  of  the  gross  income  and  need  not 
be  listed  in  making  the  return  of  the  Income:  proceeds  from 
life  insurance  policies  of  any  kind  except  interest  payments 
made  to  beneficiaries  (130)  ;  income  from  United  States 
bonds  or  of  any  of  its  possessions,  or  from  bonds  of  a  State 
or  of  any  of  the  political  subdivisions  thereof  (128)  ;  income 
from  salaries  paid  to  officers  of  a  State  or  any  subdivision 
thereof,  including  public  school  teachers,  unless  such  salaries 
are  paid  by  the  United  States  (1f31) ;  the  value  of  property 
acquired   by  gift,   bequest,   devise  or  descent    (129).      The 


Analysis  15 

salaries  of  the  President  of  the  United  States  for  the  present 
term  and  of  United  States  judges  who  were  in  office  when  the 
law  was  enacted  are  not  subject  to  the  tax,  because  of  the  con- 
stitutional provision  that  these  salaries  shall  not  be  changed 
during  the  term  of  office.  (St.  B.)  See  Article  5  of  the 
Treasury  Regulations  herein,  and  succeeding  paragraphs,  to 
30  inclusive. 

1(20.  Net  Income  Defined.  Net  income  alone  is  taxable, 
and  under  the  provisions  of  the  Income  Tax  law  net  income 
is  the  gross  income  as  defined  in  the  two  preceding  para- 
graphs, less  the  deductions  as  noted  in  the  following  para- 
graphs. Gross  income  in  realty  is  all  income,  but  gross  in- 
come for  purposes  of  taxation  under  this  act  is  the  income 
less  the  nontaxable  items  mentioned  in  paragraph  19.  From 
this  taxable  gross  income  the  net  income  is  obtained  by  de- 
ducting the  expense  of  conducting  business,  interest  paid  on 
debts,  taxes  paid,  losses  sustained  and  not  otherwise  com- 
pensated, debts  due  to  individual  taxpayer  and  found  to  be 
worthless,  and  a  reasonable  allowance  for  wear  and  tear. 
These  six  items,  discussed  in  paragraphs  21  to  26  inclusive, 
deducted  from  gross  income,  leave  the  legal  definition  of  net 
income.  Even  of  the  net  income,  however,  there  are  three 
items  which  are  not  taxable,  to  wit,  the  amount  represented 
by  income  of  an  individual  from  stock  in  a  corporation  which 
has  paid  tax  on  its  income  (1149),  the  amount  of  income  the 
normal  tax  on  which  has  been  withheld  or  paid  at  the  source 
(1132),  and  the  individual  exemption  of  $3,000  for  an  un- 
married person  or  $4,000  for  a  married  person  (1f58).  See 
Insurance  Companies,  1143,  "Accrued  income"  defined,  |46. 
Treasury  Regulations  1  to  6.  For  Corporation  deductions, 
see  T.  R.  113. 

H21.  Expenses  of  Conducting  Business.  This  is  the  first 
deduction  allowed  from  taxable  gross  income  for  the  purpose 
of  determining  the  net  income.  This  deduction  is  meant  to 
include  the  necessary  and  usual  expenses  of  conducting  the 
business.  This  item  includes  the  actual  expenditures  during 
the  year  for  conducting  the  business  and  making  necessary 


16  Fedebal  Income  Tax 

repairs,  but  not  for  permanent  improvements  or  increase  of 
capital  or  resources.  It  includes  the  cost  of  labor,  fuel,  lights, 
rent,  taxes,  and  insurance,  except  for  life  insurance  for  the 
benefit  of  a  personal  beneficiary.  The  expenses  for  supplies 
for  office  use  should  include  only  the  amount  used  and  not 
the  total  purchased.  The  cost  of  repairs  necessary  for  ope- 
rating the  business,  but  which  do  not  add  to  the  value  of  the 
business,  is  allowable  as  a  deduction.  "Ordinary  and  neces- 
sary" are  the  terms  which  fix  the  expenses  allowed  to  be  de- 
ducted. For  fuller  details,  see  the  Treasury  Regulations 
herein,  Articles  14,  114,  116,  120.  This  deductible  allow- 
ance cannot  include  personal,  living  or  family  expenses," 
such  as  medical  attendance,  family  supplies,  wages  of  domes- 
tic servants,  cost  of  board,  room-rent,  house-rent,  repairs  on 
residence,  etc.     Farming,  Tf51. 

1f22.  Interest  Paid  on  Debts.  This  is  the  second  deduc- 
tion allowed  from  the  gross  income  in  fixing  the  net  income, 
and  is  fully  covered  by  subsection  B  of  the  Statute  and  the 
Treasury  Regulations.  The  rules  for  individuals  and  for  cor- 
porations are  different.  An  individual  is  allowed  to  deduct 
all  interest  actually  paid  by  him  on  outstanding  debts  during 
the  year,  provided  that  interest  accrued  during  that  year,  and 
was  not  past-due  interest,  and  it  cannot  include  any  payment 
made  on  the  principal  of  the  indebtedness.  For  corporations 
the  same  rule  applies,  except  that  the  amount  of  the  exemp- 
tion is  limited.  The  amount  of  corporation  indebtedness  for 
which  interest  deduction  is  allowable  cannot  exceed  one-half 
of  the  amount  of  the  interest-bearing  indebtedness  plus  the 
paid-up  capital  stock  outstanding  at  the  close  of  the  year. 
(T.  D.  1960.)  If  the  association  or  company  has  no  capital 
stock  then  the  amount  of  indebtedness  on  which  the  deduct- 
ible interest  is  allowable  cannot  exceed  the  amount  of  capital 
actually  employed  in  the  business  at  the  close  of  the  year. 
Corporation  indebtedness,  secured  wholly  by  collateral,  which 
is  the  subject  of  sale  in  the  ordinary  business  of  the  corpora- 
tion, does  not  come  within  the  limitation,  but  if  the  interest 
incoming  from  such  collateral  is  returned  as  part  of  the  in- 


Analysis  17 

come,  then  all  the  interest  paid  on  the  collaterally  secured 
debt  is  deductible.  Treasury  Regulations  148  and  150,  and 
T.  D.  1993.    Withheld  at  source,  1(32  and  T.  R.  37. 

1123.  Taxes  Deductible.  This  third  deduction  is  allow- 
able to  the  amount  of  taxes  actually  paid  out  during  the  year, 
but  not  for  taxes  that  became  due  but  were  not  paid  during 
the  year.  (St.  B.)  Taxes  for  this  deduction  include  Na- 
tional, State,  county,  municipal  and  school,  but  not  those  for 
local  benefits,  such  as  special  district  taxes  for  irrigation, 
drainage,  reclamation,  sidewalks,  streets,  paving,  etc.  (T.  D. 
2090,  page  11.)  Taxes  paid  abroad  are  not  deductible. 
Foreign  corporations  doing  business  in  the  United  States  are 
taxed  only  on  their  income  from  business  in  the  United 
States,  and  only  taxes  in  the  United  States  are  deductible. 
(H34.)  A  corporation  cannot  deduct  taxes  assessed  against 
its  shareholders  under  a  State  statute,  but  the  individuals 
deduct  the  amount  from  their  own  returns.  Import  duties 
are  not  deductible  as  taxes,  but  may  be  included  as  expense 
of  carrying  on  business  when  they  actually  are  so.  (T.  R, 
155.)  A  corporation  paying  a  certain  tax  on  a  contract  that 
certain  bonds,  etc.,  shall  not  be  taxed  cannot  deduct  the 
amount  of  such  tax.     (T.  R.  153,  T.  D.  1948.) 

1J24.  Losses  Deductible.  Fourth  among  the  six  deduc- 
tions, according  to  the  wording  of  the  statute  (B),  is  "losses 
actually  sustained  during  the  year,  incurred  in  trade  or  aris- 
ing from  fires,  storms  or  shipwreck,  and  not  compensated  for 
by  insurance  or  otherwise."  (T.  D.  1989  and  2005.)  Con- 
cerning this  provision,  the  draftsman  of  the  bill,  Representa- 
tive Cordell  Hull,  said  in  the  House,  April  2G,  1913 :  "These 
provisions  primarily  contemplate  allowance  for  losses  grow- 
ing out  of  the  trade  or  business  from  which  the  taxable  in- 
come is  derived,  and  generally  termed  trade  losses,  as  distin- 
guished from  losses  of  capital  or  principal  or  losses  incurred 
entirely  apart  from  business  transactions  from  which  income 
is  derived.  A  similar  rule  goverus  deductions  for  expenses." 
The  losses  deductible  are  those  occurring  directly  as  a  part 
of  the  business  and  as  a  result  of  the  operations  in  connection 
2 


18  Fedebal  Income  Tax 

with  it.  A  loss,  to  be  deductible,  must  be  one  that  has  al- 
ready been  paid  off  or  charged  off  the  books,  and  not  merely 
an  estimated  or  speculative  loss.  Treasury  Regulations, 
Articles  124,  126,  127,  128,  138.  Insurance  Companies,  If 43 
and  T.  R.  147a.  See  T.  D.  2135,  page  5.  Losses  from  sale 
of  real  estate  (1f50)  are  not  deductible.     (T.  D.  1989.) 

1f25.  Debts  Proven  Worthless.  The  fifth  deduction  is 
"debts  due  to  the  taxpayer  actually  ascertained  to  be  worth- 
less and  charged  off  within  the  year."  Treasury  Department 
ruling  2224  construes  this  provision  to  include  unpaid  and 
uncollectible  wages,  salaries,  rents,  etc.,  provided  that  such 
were  listed  as  income  for  the  year  in  which  they  became  due 
and  were  afterwards  ascertained  to  be  uncollectible.  The 
same  regulation  says  that  all  debts  that  became  due  and  pay- 
able prior  to  March  1,  1913,  and  not  ascertained  to  be  worth- 
less prior  to  that  date,  are  allowable  as  deduction  for  the  year 
in  which  they  are  actually  ascertained  to  be  worthless  and  are 
charged  off  the  books.  Treasury  Regulation  125  construes 
the  words  "ascertained  to  be  worthless"  to  mean  "after  legal 
proceedings  to  collect  same  have  proved  fruitless,  or  it  clearly 
appears  that  the  debtor  is  insolvent."  If  the  debts  are  subse- 
quently collected  after  being  charged  off,  they  must  be  listed 
as  income  for  the  year  in  which  they  are  collected.  Briefly, 
when  one  listing  his  income  tax  lists  a  certain  debt  as  de- 
ductible, he  must  show  his  reason  for  charging  it  off  his  books, 
and  if  the  Collector  has  any  doubt  about  it,  he  has  power  to 
call  for  fuller  details.  This  deduction  does  not  apply  to  cor- 
porations, but  only  to  individuals.  For  Corporation  exemp- 
tions see  St.  G(b)  and  T.  R.  113.  Accrued  income,  Tf46. 
Professional  fees,  H47. 

1f26.  Depreciation.  Sixth  among  the  allowable  deduc- 
tions is  "a  reasonable  allowance  for  the  exhaustion,  wear  and 
tear  of  property  arising  out  of  its  use  or  employment  in  the 
business,  not  to  exceed,  in  the  case  of  mines,  5  per  centum  of 
the  gross  value  at  the  mine  of  the  output  for  the  year  for 
which  the  computation  is  made."  (T.  R.  6,  142,  145,  and 
T.  D.  2137,  page  7.)     No  deduction  is  allowable  for  repair- 


Analysis  19 

ing  or  restoring  such  wear  and  tear,  for  which  an  allowance 
has  elsewhere  been  made,  and  none  for  new  buildings  and 
permanent  improvements  made  to  increase  the  value  of  the 
property.  "Depreciation"  as  herein  allowed  is  entirely  dis- 
tinct from  "losses"  as  discussed  in  paragraph  24.  The 
"losses"  must  be  absolute  and  complete,  while  the  "wear  and 
tear"  or  "depreciation"  constituting  the  sixth  allowable  de- 
duction is  merely  a  reduction  in  the  value  and  not  a  loss  of 
it.  This  depreciation  is  defined  by  Treasury  Regulation 
2005  as  "the  deterioration  of  physical  improvements  or  as- 
sets, such  as  are  susceptible  of  having  their  value  lessened 
through  wear  and  tear,  use  or  obsolescence."  Shrinkage  in 
the  market  value  of  stocks,  bonds  and  like  securities  is  not 
allowable  as  a  deduction  under  either  provision.  This  pro- 
vision of  the  statute  is  clearly  defined  in  Articles  129  and 
130  of  the  Treasury  Regulations  herein,  and  the  summary 
of  which  is  that  depreciation  must  be  such  as  is  not  covered 
by  the  expenses  of  operating,  must  be  due  to  the  wear  and 
tear  of  ordinary  use,  and  must  be  so  averaged  up  from  year 
to  year  that  all  the  allowances  together  would  constitute  the 
value  of  the  life  of  the  property.  For  "Depreciation"  on 
Patents  see  1f56.  Farms,  1J51.  See  T.  D.  2005,  2131,  and 
2137,  page  5.     Depreciation  for  Fiduciaries,  T.  D.  2267. 

1f27.  Exemptions  from  Net  Income.  This  paragraph  dis- 
cusses the  part  of  the  net  income  that  is  not  taxable  (T.  R.  3). 
The  preceding  six  paragraphs  defined  the  six  parts  of  gross 
income  which  are  not  included  in  net  income.  Preceding 
them,  in  paragraph  19,  are  listed  four  items  that  are  part  of 
gross  income,  but  not  taxable  and  not  required  to  be  listed. 
All  the  paragraphs  from  18  to  26  inclusive  constitute  the 
legal  definition  of  net  income,  and  this  paragraph  added  to 
it  defines  what  is  taxable  net  income.  The  first  exemption 
is  that  part  of  the  net  income  which  is  represented  by  the 
dividends  on  stocks  in  corporations  and  other  associations  on 
which  the  corporation  itself  paid  the  normal  tax.  (St.  B.  and 
1149.)  The  second  is  that  part  of  the  net  income  on  which  the 
tax  was  withheld  and  paid  at  the  source,  as  explained  in  para- 


20  Federal  Income  Tax 

graph  32.  The  third  is  the  exemption  of  $3,000  for  an  indi- 
vidual who  is  not  married,  or  $4,000  if  married.  (St.  C, 
If 58.)  This  latter  obviously  does  not  apply  to  corporations, 
which  are  required  to  pay  the  normal  tax  of  1  per  centum, 
and  that  only  on  all  their  net  income.  If  both  husband  and 
wife  have  sejjarate  incomes,  the  return  for  both  of  them  shall 
be  made,  but  only  one  exemption  of  $4,000  shall  be  allowed. 
(1f52.) 

1f28.  Bonds.  Government  bonds  are  not  taxable  under 
the  Income  law.  The  Sixteenth  Amendment  permits  the  tax 
to  be  levied  on  income  "from  whatever  source  derived,"  but 
notwithstanding  this,  the  Pollock  case  (1110)  and  many  others 
have  plainly  held  that  one  taxing  power  cannot  tax  another 
taxing  power,  and  the  present  statute  accordingly  exempts 
the  income  from  all  Government  bonds.  (St.  B.)  The  bonds 
exempt  are  those  of  the  United  States  or  any  of  its  posses- 
sions, a  State,  city,  town,  or  any  other  political  subdivision 
of  a  State.  (T.  R.  5.)  The  provision  does  not  include  any 
kind  of  private  obligation  or  bond,  but  only  those  under  the 
legislative  authority  of  a  State  or  of  the  United  States.  Any 
bonds  or  obligations  of  any  taxation  district  duly  authorized 
by  a  State  are  included.  By  Treasury  Department  ruling 
1946  it  is  held  that  the  provision  specifically  includes  the 
bonds  of  special  assessment  districts  under  the  constitutional 
authority  of  a  State,  such  as  districts  for  improvements  of 
streets  or  highways,  sewerage,  gas,  light,  reclamation,  drain- 
age, irrigation  for  public  use,  levee  and  school  purposes.  As 
to  withholding  the  tax  on  bonds  at  the  source,  see  paragraph 
32.  Bonds,  other  than  Government  bonds,  with  a  clause 
guaranteeing  the  owner  against  any  tax,  shall  not  be  free 
from  the  income  tax.  (Section  G(b)  of  the  Statute,  and 
T.  D.  1942,  and  T.  D.  2090.)  A  corporation  or  other  tax- 
payer is  allowed  deduction  for  depreciation  in  value  of  bonds 
purchased  above  par  which  decrease  as  the  time  of  maturity 
approaches,  the  deduction  to  be  proportionate  with  the  num- 
ber of  years  of  the  life  of  such  bonds,  and  the  decrease  in 
value  to  be  entered  on  the  books  of  account.     (T.  R.  135.) 


Analysis  21 

If 29.  Gifts  and  Bequests.  Property  acquired  by  gift  or 
bequest,  like  tbe  income  from  bonds  and  life  insurance,  are  in 
reality  a  part  of  the  gross  income,  but  are  not  to  be  considered 
as  such  for  purposes  of  taxation.  (St.  B.)  Any  property, 
real  or  personal,  acquired  by  gift,  bequest,  devise  or  descent, 
in  any  year,  is  not  to  be  included  as  part  of  the  income  for 
that  year,  but  the  income  from  it  during  the  year  and  after 
being  acquired  is  to  be  included.  (T.  R.  4.)  Treasury 
Regulations  120  and  121  concern  donations  made  to  others 
and  not  received  by  the  taxpayer.  Such  gifts  or  donations 
which  are  paid  as  pensions  to  retired  employees  or  on  account 
of  injuries  received  by  employees,  or  for  charitable  or  educa- 
tional purposes  directly  in  connection  with  the  business,  are 
allowable  as  deductions  under  the  head  of  "expenses."  (See 
paragraph  21  above.)  Gifts  or  gratuities  to  employees  not  as 
a  regular  system  in  the  business  are  not  deductible  for  "ex- 
penses" or  otherwise.     (T.  R.  120.) 

1[30.  Life  Insurance.  Income  from  life  insurance  shall 
not  be  included  in  the  taxable  income,  with  only  one  excep- 
tion. (St.  B.)  This  exception  is  an  interest  payment  to  a 
beneficiary  or  an  excess  repayment  to  the  insured.  (T.  R. 
56  and  T.  D.  2090.)  Premiums  paid  on  life  insurance  do 
not  constitute  an  allowable  deuction  as  necessary  expense,  but 
are  a  part  of  personal  expenses.  (If 21.)  When  a  partner- 
ship or  corporation  pays  premiums  on  life  insurance  of  in- 
dividual members  for  the  benefit  of  the  business,  the  amount 
so  paid  is  deductible  as  "expenses,"  but  when  such  policies 
mature  or  otherwise  become  payable  by  the  Insurance  Com- 
pany, the  amount  so  received  must  be  included  as  income. 
(T.  D.  2090,  pages  11  and  23,  and  T.  D.  2152.)  The  amount 
received  from  a  life  insurance  policy  on  the  death  of  the  in- 
sured is  not  to  be  included  as  income  by  the  beneficiary,  and 
the  amount  received  by  the  insured  himself  at  the  maturity 
of  an  endowment  or  cash-surrender  policy  is  not  to  be  counted 
as  income,  but  the  amount  by  which  life  insurance  exceeds  the 
premiums  paid,  when  returned  to  the  insured  himself,  is  to 
be  counted  as  income.     (T.  D.  2090,  under  head  of  Annuity.) 


22  Federal  Income  Tax 

An  insurance  agent  must  return  as  income  his  commissions 
on  insurance  premiums.  (T.  D.  2011.)  Insurance  com- 
panies.    (1J43.)     See  T.  D.  2137,  page  2. 

1J31.  Salaries.  All  salaries  except  those  specifically  ex- 
empted are  taxable  as  income  and  are  to  be  included  in  the 
return  of  the  income,  and  salaries,  as  here  used,  applies  to 
wages  and  other  compensation  for  personal  services.  (St.  B.) 
The  tax  is  paid  by  the  employer  unless  the  amount  is  so  un- 
certain that  he  cannot  determine  it,  this  being  what  is  known 
as  "withholding  at  the  source"  as  discussed  in  paragraph  32. 
The  amount  of  mileage  or  "subsistence,"  as  also  "board"  or 
other  compensation,  is  to  be  counted  as  part  of  the  salary,  but 
as  to  mileage  and  "subsistence,"  only  to  the  extent  of  the 
excess  over  the  actual  expense.  This  tax  applies  to  all  officers 
and  employees  of  the  United  States  whose  income  exceeds 
$3,000,  and  in  such  cases  the  amount  of  the  tax  is  withheld 
by  the  paymaster  and  paid  by  him.  (T.  D.  2079.)  (The 
President,  during  the  present  term  of  his  office,  and  all 
United  States  judges,  during  present  terms  of  office,  are  ex- 
empt from  this  tax.  1fl9.)  Salaries  paid  by  a  State  or  any 
political  subdivision  thereof,  as  a  city,  county,  or  town,  are 
exempt  from  taxation,  and  this  includes  salaries  of  public 
school  teachers  unless  their  salaries  are  paid  by  the  United 
States.  (T.  R.  5e. )  No  salary  is  taxable  under  any  circum- 
stances unless  it,  together  with  other  income,  exceeds  the  ex- 
emptions and  deductions  allowed  by  law  as  shown  in  preced- 
ing paragraphs.  Compensation  for  personal  services  is  to  be 
returned  as  income,  including  produce,  rent,  board,  or  in 
"whatever  form  paid."  For  Professional  fees  see  1J47.  For 
Salaries  plus  commissions  see  T.  D.  2090,  "Compensation." 
H32.  Withholding  at  Source.  This  provision  in  subsec- 
tion D  of  the  Statute  has  been  most  misunderstood  and  most 
criticised  of  all  the  requirements.  It  has  been  said  that  this 
requirement  in  the  English  law  made  it  a  success,  presum- 
ably that  because  of  it  individuals  could  not  escape  the  tax ; 
but  in  America  it  has  caused  complaint,  and  suggestions  for 


Analysis  23 

amending  or  repealing  it  have  been  made.  It  simply  requires 
that  when  any  bank  or  other  corporation  or  agent  has  the 
duty  of  handling  and  receiving  certain  income  belonging  to 
an  individual,  then  the  corporation  or  other  agent  must  with- 
hold the  tax  before  paying  out  the  amount  to  the  individual, 
and  pay  the  tax  to  the  collector.  (T.  R.  29-75.)  This  ap- 
plies, however,  only  when  the  amount  to  be  so  paid  out  ex- 
ceeds $3,000.  It  does  not  apply  to  interest  paid  by  banks 
on  deposits.  (T.  R.  67.)  An  agent  whose  duty  it  is  to  col- 
lect rents,  etc.,  for  a  landlord,  withholds  the  tax  only  when 
the  total  amount  reaches  $3,000.  The  provision  for  with- 
holding applies  only  to  the  normal  tax  of  1  per  centum,  and 
does  not  apply  to  the  income  from  dividends  from  stocks  on 
which  the  normal  tax  is  paid  elsewhere.  (H49.)  The  pro- 
vision as  to  withholding  applies  to  banks,  corporations,  trust 
companies,  associations,  organizations,  trustees  acting  in  any 
trust  capacity,  agents,  administrators,  executors,  receivers, 
conservators,  employers,  Government  paymasters,  and  all 
others  entrusted  with  the  control  of  income  payable  to  any 
taxpayer,  provided  such  income  exceeds  $3,000  (St.  E.)  It 
is  not  required  of  corporations  or  other  organizations  which 
are  not  themselves  subject  to  the  tax.  (T.  R.  37  and  T.  D. 
1967.)  The  tax  is  not  to  be  paid  prior  to  thirty  days  before 
return  is  due.  (T.  R.  33a  and  T.  D.  1965.)  Reports  are 
required  from  withholding  agents  on  special  blanks  supplied 
by  the  collector  of  the  district.  (T.  D.  1976.)  See  Fiduci- 
aries, 1f33.  Banks,  1f38.  Partnerships,  1f36.  See  T.  D.  2135, 
page  7. 

1f33.  Fiduciaries.  Guardians,  trustees,  executors,  admin- 
istrators, agents,  receivers,  conservators,  and  all  persons,  cor- 
porations, or  associations  acting  in  any  fiduciary  capacity, 
are  referred  to  as  fiduciary  agents  by  Treasury  Regulation, 
Article  70.  All  such  fiduciaries  are  required  to  list  the  in- 
come for  the  person  for  whom  they  act  in  such  capacity.  They 
list,  however,  only  such  part  of  the  income  as  comes  into 
their  control.  All  such  income  which  may  be  subject  to  a 
withholding  tax  elsewhere,  by  notice  from  the  fiduciary,  will 


'24:  Federal  Income  Tax 

become  subject  to  the  withholding  tax  only  by  the  fiduciary 
aud  not  elsewhere.  The  return  by  the  fiduciary  is  to  be  made 
only  when  the  income  for  the  beneficiary  exceeds  $3,000, 
and  in  this  and  other  things  it  is  subject  to  the  same  regula- 
tions as  individual  returns,  though  made  on  a  different  form. 
(T.  D.  2090,  "Fiduciaries.")  Treasury  regulations,  70-75. 
See  Withholding,  1J32.  Where  a  fiduciary  or  guardian  acts 
only  for  one  person,  the  return  is  made  for  the  person  by  the 
fiduciary  as  any  personal  return.  Fiduciaries  acting  for 
more  than  one  person  must  report  to  the  collector  for  all  of 
them,  and  also  make  a  return  for  each  one  whose  income  ex- 
ceeds $3,000.  (T.  D.  1943,  1947,  1961,  2231.)  See  1f53 
for  Forms.    Depreciation  for  Fiduciaries,  T.  D.  2267. 

1134.  Foreign  Corporations.  The  normal  tax  of  1  per 
cent  must  be  paid  by  foreign  corporations  the  same  as  if  they 
were  domestic  corporations,  though  they  are  required  to  pay 
the  tax  only  on  that  portion  of  their  income  accruing  from 
business  done  in  the  United  States.  (St.  E.)  If  such  cor- 
poration has  more  than  one  branch  office  in  the  United  States 
it  must  designate  to  the  Department  the  office  and  the  person 
who  is  authorized  to  make  the  return  of  the  income.  (T.  R. 
83.)  The  allowable  deduction  for  taxes  paid  is  for  taxes  paid 
in  the  United  States  only,  and  other  deductions  are  likewise 
limited.  For  foreign  corporations,  as  for  domestic  corpora- 
tions, there  is  no  allowable  deduction  for  debts  proven  worth- 
less, as  in  the  case  of  individuals.  Foreign  corporations,  with 
respect  to  their  business  in  the  United  States,  are  treated  ex- 
actly on  a  basis  with  domestic  corporations.  (1115.)  Form 
of  return,  T.  R.  163.  Foreign  corporation  bonds,  T.  D.  1992. 
Foreign  corporations  subject  to  tax,  T.  D.  2161,  page  2. 

If35.  Americans  Residing  Abroad.  The  Income  tax  is 
levied  upon  "every  citizen  of  the  United  States,  whether  re- 
siding at  home  or  abroad,  and  every  person  residing  in  the 
United  States,  though  not  a  citizen  thereof."  (St.  A.)  For 
a  foreigner  residing  abroad  the  income  is  based  on  his  prop- 
erty in  the  United  States.  (1(45.)  The  citizen  residing 
abroad  may  make  his  own  return  of  income,  or  it  may  be 


Analysis  25 

made  for  hini  in  liis  own  collection  district  by  any  one  who 
will  swear  that  he  is  sufficiently  acquainted  with  his  business 
to  make  it  and  authorized  to  do  so.  (St.  E.)  There  is  no 
difference  otherwise  in  estimating  the  tax  of  the  citizen 
abroad  from  the  methods  used  if  he  were  at  home.  (T.  R. 
15-17.)  Forms  for  Returns,  1f53.  Nonresident  aliens,  1(45. 
Time  and  place  for  making  returns,  1137.  Who  must  make 
returns,  1fl7. 

If36.  Partnerships.  A  partnership  is  not  required  to 
make  return  of  income,  except  when  specially  requested  to  do 
so  by  the  Collector  of  Internal  Revenue  for  the  district  in 
which  it  is  located.  (St.  D.)  When  this  is  requested  the 
partnership  must  make  a  correct  and  complete  statement  of 
gross  income,  actual  expenses,  net  profit,  and  the  names  and 
addresses  of  all  persons  who  are  partners,  with  their  respect- 
ive proportional  interests  in  the  net  profits.  (T.  R.  12.) 
The  net  profits  if  divided  to  the  partners  during  the  year  are 
to  be  returned  as  income  by  the  individuals.  If  not  divided 
they  are  to  be  returned  also  by  the  individuals  as  if  they  had 
l>een  divided  and  distributed ;  but  later,  when  the  distribution 
is  made,  it  shall  not  be  required  that  the  amount  be  again  re- 
turned. (T.  R.  11-12.)  The  net  profits  must  be  returned 
by  the  partners  in  their  individual  returns,  whether  they  are 
apportioned  out  to  them  from  the  partnership  treasury  or  not. 
(T.  R.  94.)  As  a  partnership  is  not  taxable  on  its  income, 
the  "withholding"  provision  (1f32)  does  not  apply,  and  the 
tax  on  income  due  to  a  partnership  cannot  be  withheld  by 
any  one.  (T.  D.  1957.)  Partnerships  owning  bonds,  mort- 
gages, etc.,  shall  file  certificates  of  ownership  of  such  so  that 
the  normal  tax  on  them  will  not  be  withheld.  Foreign  Part- 
nerships, T.  R.  48-49.  Forms  for  returns,  lf53.  Undivided 
profits,  If 39. 

If 37.  Time  and  Place  for  Making  Returns.  All  individ- 
uals are  required  to  make  the  return  of  their  income  on  or 
before  March  of  each  year,  the  income  to  be  that  of  the  previ- 
ous calendar  year  ending  December  31.  (St.  D.)  Corpora- 
tions are  required  to  make  returns  at  the  same  time  unless 


26  Fedehae  Income  Tax 

they  apply  to  the  Collector  for  special  permission  to  make 
return  for  their  own  fiscal  year,  ending  at  some  other  time 
than  with  the  calendar  year,  and,  in  such  cases,  they  make 
the  return  within  sixty  days  after  the  end  of  the  fiscal  year. 
(T.  D.  2029.)  (According  to  the  report  of  the  commissioner 
not  more  than  20  per  cent  of  the  corporations  ask  for  this 
special  permission,  the  others  preferring  to  make  their  fiscal 
year  correspond  to  the  calendar  year.)  Both  individuals  and 
corporations  make  their  returns  to  the  Collector  of  that  dis- 
trict in  which  is  located  their  principal  place  of  business. 
(T.  R.  15;  St.  D. ;  T.  D.  2090.)  The  taxpayer  is  notified 
on  or  before  June  1  of  the  amount  of  tax  due,  and  it  is  to  be 
paid  on  or  before  June  30.  (T.  R.  25  and  197.)  For  un- 
avoidable causes,  special  permission  may  be  obtained  from 
the  Collector  for  delay  not  exceeding  thirty  days  in  making 
the  return,  but  the  permission  must  be  requested  in  advance 
of  the  time  for  return.  (T.  R.  23  and  173.)  The  return 
is  due  to  be  made  on  or  before  March  1 ;  the  taxpayer  is  noti- 
fied of  the  amount  of  his  tax  on  or  before  June  1,  and  the 
amount  must  be  paid  on  or  before  June  30.  Who  must  make 
returns,  117.  Time  for  returns  and  penalties,  T.  D.  1950. 
Penalties,  If 40. 

138.  Banks.  All  National  and  State  and  private  incor- 
porated banks,  trust  companies,  etc.,  operated  for  private 
gain  of  the  stockholders,  are  subject  to  all  the  provisions  of 
the  Income  Tax  law  as  to  corporations.  (115.)  The  one  ex- 
ception is  a  mutual  savings  bank  not  having  a  capital  stock 
represented  by  shares,  which,  though  called  a  bank,  is  in  real- 
ity merely  an  association  for  the  benefit  of  all  concerned  and 
not  for  the  gain  of  any  special  persons.  (St.  G  a).  Gross 
income  of  banks  consists  of  the  total  revenue  derived  from 
the  operation  of  the  business,  including  income,  gains,  or 
profits  from  all  other  sources,  as  shown  by  the  entries  on  the 
books  for  the  year  for  which  the  return  is  made.  A  bank,  as 
any  other  corporation,  may  make  the  return  either  for  the 
calendar  year  or  for  its  own  fiscal  year  (137.)  Interest  paid 
by  a  bank  to  the  depositors  is  deductible  under  allowance 


Analysis  27 

for  interest,  but  the  total  amount  on  which  such  interest  is 
paid  cannot  exceed  the  amount  of  the  capital  stock  plus  one- 
half  the  outstanding  interest-bearing  indebtedness.  (1122.) 
A  bank  is  a  withholding  agent  and  is  bound  by  the  require- 
ments for  withholding  at  the  source.  (1132.)  A  bank,  how- 
ever, does  not  withhold  tax  or  interest  paid  on  deposits. 
(T.  E.  67.)  See  Treasury  Kegulations  38,  39,  43  and  46. 
Undivided  profits  or  surplus  accruing  in  any  year  for  which 
the  return  is  made  must  be  included  as  a  part  of  the  income 
of  the  bank  on  which  tax  must  be  paid.  (See  paragraphs  15 
and  36.)  Taxes  assessed  against  shareholders  are  due  to  be 
paid  by  the  holders,  and,  if  paid  by  the  bank,  cannot  be  de- 
ducted as  expense.  (T.  E.  154,  1(21.)  Withholding  certifi- 
cates, T.  D.  1986  and  2258. 

Tf39.  Surplus  and  Undivided  Profits.  Section  A  of  the 
Statute  provides  that  the  taxable  income  of  any  individual 
shall  include  the  share  to  which  he  would  be  entitled  in  any 
surplus  ox  undivided  profits,  whether  divided  or  distributed 
or  not,  in  any  corporation,  partnership  or  other  association. 
Even  if  the  company  is  a  mere  holding  company  the  same 
rule  holds.  When  requested  by  the  Commissioner  of  Internal 
Revenue  or  any  District  Collector,  such  company  must  make 
a  report  of  all  such  profits  or  surplus,  with  the  names  of  the 
individuals  who  would  be  entitled  to  the  same  if  distributed. 
If  the  gains  and  profits  shall  be  allowed  to  accumulate  and 
become  surplus,  it  shall  be  prima  facie  evidence  of  a  fraudu- 
lent purpose  to  evade  the  tax,  but  such  surplus  shall  not  be 
construed  as  evidence  of  fraud  unless  the  Secretary  of  the 
Treasury  shall  certify  that  in  his  opinion  such  accumulation 
is  unreasonable  for  the  purpose  of  the  business.  (Statute, 
section  A.)     See  Partnerships,  1136. 

140.  Penalties  and  Fines.  The  final  day  of  payment  is 
June  30,  and  to  any  taxes  remaining  unpaid  after  that  date 
and  for  ten  days  after  notice  and  demand  from  the  Collector, 
there  shall  be  added  the  sum  of  5  per  centum  on  the  amount 
of  unpaid  tax  and  interest  at  the  rate  of  1  per  centum  a  month 
from  the  time  the  tax  became  due.    (St.  G  c.)    A  corporation 


28  Federal  Income  Tax 

refusing  or  neglecting  to  make  a  return  shall  have  added  50 
per  centum  to  the  amount  of  tax,  or  for  a  false  or  fraudulent 
return,  100  per  cent  (St.  I),  besides  being  liable  to  a  specific 
penalty  not  exceeding  $10,000.  (St.  G  d.)  Any  person  or 
any  officer  of  a  corporation  required  to  make  a  return,  who 
shall  therein  make  any  false  or  fraudulent  statement  with 
intent  to  evade  the  tax,  shall  be  guilty  of  a  misdemeanor  and 
be  liable  to  a  fine  of  $2,000  and  to  imprisonment  for  one  year. 
(T.  R.  164.)  Any  person  divulging  unlawfully  any  infor- 
mation whatever  disclosed  by  a  return  shall  be  subject  to  a 
fine  of  $1,000  and  to  imprisonment  for  one  year.  (St.  I.) 
For  making  a  false  statement  for  the  purpose  of  obtaining 
any  reduction  or  exemption,  the  person  shall  be  liable  to  a 
penalty  of  $300.  (St.  E.)  The  statute  of  limitations  in 
enforcing  collection  of  income  tax  is  three  years.  (T.  R. 
177.)  Any  person,  corporation  or  association  liable  to  make 
return  and  not  making  it  in  due  time  shall  be  liable  to  a 
penalty  of  not  less  than  $20  and  not  more  than  $1,000.  (T.  R. 
164.)  As  every  return  must  be  made  under  oath,  any  willful 
misstatement  contained  in  it  is  a  violation  of  law.  A  fine  not 
exceeding  $5,000  and  imprisonment  for  a  year  may  be  im- 
posed on  any  person  or  corporation  undertaking  for  profit 
to  collect  interest  from  coupons,  checks  and  bills  of  exchange 
from  foreign  countries,  without  first  having  obtained  a  license 
for  such  purpose  from  the  Commissioner  of  Internal  Reve- 
nue. (Section  3  of  the  Statute.)  Failure  to  make  a  return 
in  due  time  by  an  individual  who  is  required  to  make  it 
(Hi 7)  incurs  a  penalty  of  not  less  than  $20  nor  more  than 
$1,000.  (See  Protests,  H54,  and  Compromises,  T.  D.  2015.) 
1f41.  Inspection  of  Returns.  It  is  unlawful  for  any  offi- 
cial or  other  person  to  divulge  any  information  from  the  re- 
turns of  income,  except  as  specifically  allowed  as  herein 
noted.  (Statute  I.)  The  returns  shall  be  open  to  inspection 
only  upon  the  order  of  the  President,  under  rules  and  regu- 
lations to  be  prescribed  by  the  Secretary  of  the  Treasury  and 
approved  by  the  President.  The  proper  officers  of  any  State 
imposing  a  general  income  tax  may,  upon  the  request  of  the 


Analysis  29 

Governor  thereof,  have  access  to  the  returns  or  an  abstract  of 
them.  (T.  R.  178.)  (Section  G,  subsection  d,  of  the 
Statute.)     (T.  D.  1962  and  2016.) 

1f42.  Powers  of  the  Collectors.  Section  3172  of  the  Re- 
vised Statutes  provides  that  every  Collector  shall,  from  time 
to  time,  cause  his  deputies  to  proceed  through  every  part  of 
his  district  and  inquire  after  and  concerning  all  persons 
therein  who  are  liable  to  pay  any  internal  revenue  tax.  The 
latter  part  of  section  D  of  the  Statute  provides  that  if  the 
Collector  or  Deputy  Collector  has  reason  to  believe  that  the 
amount  of  any  income  is  understated  he  shall  give  due  notice 
to  the  lister  to  show  cause  why  it  should  not  be  increased. 
If  the  return  shall  not  be  made  as  required  by  law,  the 
Collector  shall  cause  it  to  be  made  by  summoning  the  person 
or  others  having  charge  of  the  books  and  accounts,  and  requh-e 
them  to  produce  the  accounts  and  to  answer  any  questions 
concerning  said  income.  From  any  decision  of  the  Collector 
the  taxpayer  may  appeal  to  the  Commissioner  of  Internal 
Revenue.  See  Treasury  Regulations,  Articles  20  and  21, 
and  section  I  of  the  Statute.  Corporation  Bookkeeping,  Tf57. 
On  order  of  the  Commissioner  of  Internal  Revenue  the  books 
of  a  corporation  are  to  be  open  to  inspection.     (T.  R.  186.) 

1f43.  Insurance  Companies.  A  different  form  of  return 
is  required  for  insurance  companies,  though,  except  in  a  few 
details,  they  are  essentially  the  same  in  requirements  as  for 
other  corporations.  (St.  G  c. )  Deductions  allowable  for  in- 
surance companies  are  expenses  (1[21),  losses  (fl24),  interest 
(1f22),  taxes  (T|23),  and  the  two  following.  Fifth  is  "the  net 
addition,  if  any,  required  by  law  to  be  made  within  the  year  to 
reserve  funds."  (T.  R.  147.)  Sixth  is  "sums  other  than 
dividends  paid  within  the  year  on  policy  and  annuity  con- 
tracts." (See  Article  100  of  Treasury  Regulations.)  Mu- 
tual fire  insurance  companies  shall  not  return  as  income  any 
portion  of  premium  deposits  returned  to  policyholders,  but 
shall  return  all  income  from  other  sources  plus  such  portions 
of  the  premium  deposits  as  are  retained  by  the  companies  for 
purposes  other  than  the  payment  of  losses  and  expenses  and 


30  Federal  Income  Tax 

reinsurance  reserves.  (T.  R.  98-100.)  Mutual  marine  in- 
surance companies  may  deduct  from  gross  income  the  amount 
repaid  to  policyholders  on  account  of  premiums  previously 
paid.  (T.  R.  99.)  Life  Insurance,  130.  Corporations,  1fl5. 
Penalties,  140. 

144.  Assessment.  Section  E  of  the  Statute  says  that  "all 
assessments  shall  be  made  by  the  Commissioner  of  Internal 
Revenue,  and  all  persons  shall  be  notified  of  the  amount  for 
which  they  are  respectively  liable  on  or  before  the  first  day 
of  June  of  each  successive  year."  In  the  case  of  corporations 
whose  fiscal  years  end  at  other  times  than  December  31,  the 
assessment  is  made  within  three  months  from  the  time  of 
making  the  return.  (137.)  It  is  the  duty  of  the  Collector 
of  Internal  Revenue  for  the  district  to  have  all  returns  made 
according  to  the  requirements.  When  this  is  accomplished, 
the  returns  are  forwarded  to  the  Commissioner  in  Washing- 
ton, and  the  assessments  of  tax  are  made  by  him.  (T.  R. 
195.)  The  list  of  tax  to  be  collected  is  then  sent  to  the  Col- 
lector, and  it  is  then  his  duty  to.  collect  it.  (T.  R.  197.) 
(Protests,  154.)      . 

145.  Nonresident  Aliens.  Persons  owning  property  in 
the  United  States,  and  who  are  neither  citizens  nor  residents 
of  the  United  States,  are  subject  to  the  Income  Tax  in  so  far 
as  it  affects  the  income  from  such  property  in  the  United 
States.  (T.  R.  8.)  Such  nonresident  alien  is  allowed  all  the 
deductions  in  section  B  of  the  act,  1  to  8,  inclusive.  (T.  R. 
6.)  The  exemption  of  $3,000,  however,  is  not  allowed,  but 
the  tax  must  be  paid  on  all  the  income  in  the  United  States, 
and  the  tax  includes  the  normal  tax  and  the  additional  tax, 
as  discussed  in  paragraph  16.  (T.  D.  2109.)  The  persons 
in  charge  of  the  property  shall  make  the  return  and  pay  the 
tax.  (T.  R.  8.)  "Residence"  of  aliens  defined,  T.  D.  2242. 
As  to  exemption  on  dividends  (149),  see  T.  D.  2012.  U.  S. 
banks  as  agents  for  aliens,  T.  D.  1988.  Alien  does  not  pay 
tax  on  income  derived  wholly  in  foreign  country  for  services, 
etc.     (T.  D.  2152.) 


Analysis  31 

If 46.  "Accrued  Income"  Defined.  The  first  sentence  of 
the  Statute  says  that  the  tax  shall  be  levied  and  paid  annually 
"upon  the  entire  net  income  arising  or  accruing  from  all 
sources  during  the  preceding  calendar  year."  Section  G(a) 
of  the  Statute  likewise  imposes  the  normal  tax  for  corpora- 
tions on  the  income  "arising  or  accruing."  Section  G(c) 
says  that  "the  tax  herein  imposed  shall  be  computed  upon  the 
entire  net  income  accrued  within  each  preceding  calendar 
year."  ("Calendar  year,"  wherever  used  in  this  connection, 
is  subject  to  the  provision  that  any  corporation  may  substi- 
tute its  own  fiscal  year  as  stated  in  1(37.)  This  word,  "accru- 
ing" or  "accrued,"  has  caused  misunderstanding  in  view  of 
the  fact  that  the  excise  corporation  tax  of  1909  (IfH)  im- 
posed the  tax  on  "income  received."  This  presents  the  ques- 
tion as  to  whether  ox  not  the  tax  under  the  present  Statute 
is  to  be  paid  on  the  income  that  was  actually  received  during 
the  year,  or  that  accrued  and  was  therefore  due  to  be  received. 
The  distinction  and  meaning  can  probably  be  made  clear  by 
the  requirement  as  to  partnerships.  (Tf36.)  A  partner  must 
return  the  income  which  has  "accrued"  to  him  in  the  profits 
of  the  partnership,  whether  or  not  the  "accrued"  profits  have 
been  actually  distributed  to  him  and  the  others.  It  has  been 
said  that  uncertain  income  which  "may  never  be  received" 
cannot  be  included  as  income.  (Life  Ins.  Co.  v.  Herold,  198 
Fed.  199.)  Therefore  it  may  be  held  as  certain  that  taxable 
income  does  not  include  uncertainties,  but  only  the  "accrued" 
income,  such  as  interest  or  dividends  or  profits  due  and  un- 
paid, but  collectible.  Even  if  such  should  later  not  be  col- 
lected, they  would  be  deducted  for  that  year  and  thus  the 
balance  made.    See  lf25  and  1f47,  and  T.  D.  2090,  page  13. 

1f47.  Professional  Fees.  The  first  sentence  of  section  B 
of  the  Statute  prescribes  that  "net  income  of  a  taxable  person 
shall  include  that  derived  from  professions,  vocations,  busi- 
nesses." Instructions  on  the  form  for  individual  returns  pro- 
vided by  the  Treasury  Department  prescribe:  "Persons 
receiving  fees  or  emoluments  for  professional  or  other  serv- 
ices should  include  all  actual  receipts  for  the  services  ren- 


32  Federal  Income  Tax 

dered  in  the  year  for  which  return  is  made,  together  with  all 
unpaid  accounts,  charges  for  services,  or  contingent  income 
due  for  that  year,  if  good  and  collectible."  This  requirement 
concerning  "unpaid  accounts"  has  been  misunderstood,  but 
in  connection  with  the  last  words  of  the  instruction,  "if  good 
and  collectible,"  ought  to  be  plain  enough.  It  leaves  the  pro- 
vision practically  as  "accrued  income."  (1f46.)  The  tax- 
payer is  left  as  the  judge  as  to  whether  or  not  the  "unpaid 
accounts"  are  "collectible."  If  he  should  make  a  mistake 
about  it  either  way,  it  will  be  corrected  in  subsequent  years. 
If  the  amount  should  be  returned  as  income  and  later  charged 
off  the  books  as  uncollectible,  it  would  be  deductible  for  such 
latter  year.  (1125.)  On  the  other  hand,  if  certain  unpaid 
accounts  should  be  considered  worthless  and  not  be  included 
as  income,  and  later  should  be  collected,  they  would  have  to 
be  included  as  income  for  the  year  in  which  they  were  col- 
lected. It  might  be  more  simple  to  regulate  it  as  in  Wiscon- 
sin, where,  under  the  State  law,  professional  fees  are  included 
"when  collected"  ;  but  as  the  taxpayer  is  the  judge,  the  differ- 
ence is  slight.  Fees  that  are  irregular  or  uncertain  are  not 
subject  to  withholding,  1(32.  Salaries  (H31)  paid  to  profes- 
sional men  are  subject  to  withholding. 

H48.  Rents.  Another  of  the  specific  sources  of  taxable  in- 
come is  rents.  (St.  B.)  This  includes  the  receipts  from  all 
property  used  by  another  and  for  which  use  a  certain  amount 
is  paid.  It  makes  no  difference  in  what  form  the  rent  is  paid, 
whether  in  services,  produce,  or  otherwise.  Where  land  was 
leased  and  the  lessee  erected  a  building  which  at  the  end  of  a 
term  of  years  was  to  go  to  the  owner  of  the  land,  the  cost  of 
the  building  was  held  as  rent  for  the  number  of  years.  (T.  E. 
115.)  Any  agent  entrusted  with  the  collection  of  rents  shall 
withhold  the  normal  tax  on  the  amount  after  it  exceeds 
$3,000.  (1132.)  (Interest  paid  by  corporations  as  rent, 
T.  E,  148.)  See  T.  D.  2090,  pages  16  and  23,  and  T.  D. 
2135,  page  6. 

1149.  Dividends.  The  income  from  dividends  is  a  specific- 
ally named  source  of  taxable  income.     (St.  B.)     The  Statute 


Analysis  33 

requires  that  the  income  from  all  dividends  shall  be  included 
in  the  returns,  but  that  in  computing  the  normal  tax  for  an 
individual  there  shall  be  excluded  the  amount  received  as 
dividends  from  stock  or  net  earnings  of  a  corporation  which 
is  taxable  upon  its  net  earnings.  A  corporation  must  pay  the 
tax  on  income  from  another  corporation.  (T.  D.  2090,  page 
20,  and  T.  D.  2137,  page  6.)  This  exemption  applies  only 
to  the  normal  tax,  which  on  that  income  is  paid  by  the  cor- 
poration. For  the  additional  tax  (that  on  income  exceeding 
$20,000)  the  individual  must  pay  on  income  from  dividends 
from  a  corporation  which  pays  the  normal  tax.  A  corpora- 
tion pays  the  "normal  tax"  of  1  per  cent  on  all  income,  and 
the  shareholders  pay  the  "additional"  tax  on  their  respective 
proportions  of  the  income.  As  to  dividends  of  aliens  from 
domestic  corporations  see  T.  D.  2162.  See  Statute,  sections 
B  and  G,  and  Treasury  Regulations,  Articles  6,  97,  and  107, 
and  T.  D.  1945.  A  withholding  agent  (1f32)  does  not  with- 
hold tax  on  income  accruing  to  an  individual  from  dividends 
on  stock  on  which  the  normal  tax  has  been  paid,  as  in  such 
case  the  individual  is  not  liable  for  such  tax.  (Treasury 
Regulation  6,  subsection  7;  and  1[20.)  Aliens  regarding 
dividends,  T.  D.  2017.    See  full  details,  T.  D.  2274. 

1f50.  Income  from  Sales  of  Property.  The  Statute  spe- 
cifically taxes  the  income  from  "sales,  or  dealings  in  prop- 
erty, whether  real  or  personal.  (St.  B.)  This  does  not  mean 
that  the  total  amount  received  by  an  owner  of  property  in 
selling  it  is  to  be  returned  as  income  for  that  year,  but  only 
the  profit  made  on  the  sale.  The  same  rule  applies  to  all 
kinds  of  property,  real  estate,  products,  stocks,  bonds,  and 
securities.  If  property  is  sold  which  was  bought  many  years 
previously  the  profit  is  to  be  prorated,  and  only  the  portions 
of  such  profit  that  have  accrued  since  March  1,  1913,  for  in- 
dividuals, and  since  January  1,  1909,  for  corporations,  are 
to  be  included  as  income.  It  is  governed  by  the  same  rule 
if  the  transaction  is  a  part  of  regular  business  or  merely  an 
individual  act.  Profits  so  made  by  regular  real  estate  dealers 
or  other  persons  acting  as  agents  for  the  real  owners  in  the 
3 


34  Federal  Income  Tax 

sale  of  real  estate  or  securities  are  to  be  returned  by  the 
dealer  on  bis  own  part  of  tbe  profit,  and  by  the  owner  on  bis 
sbare  of  it.  For  income  tax  purposes,  wbere  there  is  an 
actual  transfer  of  the  property,  the  profit  will  be  counted  as 
of  that  year,  even  though  the  payments  are  to  be  made  in 
installments.  See  Treasury  Department  Ruling  No.  2090, 
under  head  of  "Profit  From  Sale  of  Real  Estate,"  and  T.  D. 
2137,  page  8. 

1J51.  Income  from  Farming.  Any  farmer  whose  net  in- 
come exceeds  $3,000  from  all  sources  must  list  the  return  of 
his  income.  These  regulations  apply  to  plantations,  ranches, 
stock  farms,  dairies,  fruit  and  truck  farms,  and  all  land  used 
for  similar  purposes.  The  return  must  include  every  item  of 
income  from  all  sources,  sales  of  stock  and  products,  and  any 
other  profits  from  dealing  in  farm  products.  The  income  is 
to  be  calculated  for  the  year  in  which  the  products  were  actu- 
ally marketed  and  sold.  Rents  received  in  crop-shares  shall 
be  included  as  income  for  the  year  in  which  the  crop-shares 
were  reduced  to  a  money  equivalent.  Deductions  and  exemp- 
tions for  expenses,  wear  and  tear,  etc.,  are  allowable  as  ex- 
plained in  paragraphs  21  to  29  inclusive.  Machinery  cannot 
be  included  as  expense,  as  it  is  an  addition  to  the  capital,  but 
the  renewal  of  furnishings  and  implements  and  the  cost  of 
ordinary  working  tools  are  a  part  of  the  expense.  Money 
expended  for  stock  for  breeding  purposes  is  an  addition  to 
capital  and  not  allowable  as  a  deduction  for  expense;  but 
money  expended  for  stock  for  temporary  trading  purposes 
and  intended  for  resale  is  an  allowable  expense.  Personal 
and  family  expenses  are  not  deductible  expenses,  but  are  part 
of  the  taxable  income.  Allowance  for  "wear  and  tear"  (1|26) 
is  deductible  for  depreciation  in  value  of  farm  buildings, 
machinery  and  stock,  but  not  for  the  personal  dwelling  of  the 
owner.  A  person  operating  a  farm  for  recreation  and  pleas- 
ure and  whose  expense  therefrom  exceeds  the  income  need 
not  report  the  income,  and  the  actual  net  expense  is  personal, 
and  therefore  not  allowable  as  a  deduction.  See  Treasury 
Department  Ruling  No.  2153,  and  1fl3. 


Analysis  35 

1f52.  Husband  and  Wife,  Joint  Income.  Section  C  of  the 
Statute  contains  the  "specific  exemption"  of  $3,000  of  net 
income  for  a  single  person,  or  $4,000  if  married  and  living 
with  his  wife,  or,  if  a  woman,  living  with  her  husband.  When 
they  are  separated  and  in  no  way  dependent  one  on  the  other 
they  are  each  entitled  to  all  the  exemptions,  and  each  must 
list  the  income  regardless  of  the  other.  When  living  together 
they  both  together  are  entitled  to  one  exemption  of  $4,000. 
(1f58.)  If  each  has  a  separate  income  the  income  of  both 
may  be  made  on  one  return  with  the  amount  of  the  income 
of  each  and  the  full  name  and  address  of  each.  The  husband 
is  presumed  by  the  law  to  know  of  his  wife's  income  and  to 
include  the  amount  of  it  in  his  own  return  unless  otherwise 
stated.  If  the  aggregate  net  income  of  both  of  them  together 
is  in  excess  of  $3,000  they  are  required  to  make  the  return, 
though  the  tax  is  assessed  only  on  the  excess  over  $4,000. 
The  single  or  married  status  of  the  person  claiming  the 
"specific"  exemption  shall  be  as  of  the  time  of  claiming  the 
exemption  if  the  claim  is  made  during  the  taxable  calendar 
year,  and  if  the  claim  is  not  made  during  the  year  then  it  is 
taken  as  of  the  status  on  the  last  day  of  the  calendar  year. 
See  Treasury  Kegulations,  Articles  9  and  10.  Time  and 
place  for  returns,  1f37.  The  joint  return  applies  only  to  the 
normal  tax.  The  additional  tax  must  be  based  on  separate 
returns.  (T.  D.  2090,  "Husband.")  When  living  apart 
only  $3,000  is  allowed  as  exemption,  T.  D.  2135,  page  4. 
Wife's  income  included  as  husband's,  T.  D.  2135,  page  4. 

1153.  Forms  for  Returns.  Different  kinds  of  blank  forms 
are  required.  For  an  individual  or  for  a  fiduciary  or  other 
agent  who  makes  the  return  for  an  individual,  Form  1040,  re- 
vised, is  used.  For  a  corporation  other  than  an  insurance 
company  it  is  Form  1031.  Insurance  companies  use  Form 
1030.  Fiduciaries  or  other  agents  serving  in  such  capacity 
of  trust  for  a  number  of  persons  are  required  to  make  the 
return  for  each  on  Form  1040,  and  another  return  for  all 
together  on  Form  1041.  (133.)  Withholding  agents  use  Form 
1042  (1f32),  and  partnerships  1065.     (1136.)     Every  person 


36  Federal  Income  Tax 

or  corporation  liable  for  the  tax,  whose  name  is  already  listed 
with  the  Collector  of  the  district,  will  be  supplied  with  the 
necessary  form;  but  the  responsibility  is  the  taxpayer's,  and 
it  is  his  duty  to  apply  for  the  form  if  it  is  not  sent  to  him. 
(1f40.)  In  all  cases  the  application  for  the  blank  form  or  the 
return  itself  shall  be  made  to  the  Collector  of  the  district  in 
which  is  located  the  taxpayer's  principal  place  of  business. 
(Tf37.)  Each  return  contains  four  general  divisions:  all  in- 
come listed  from  each  specific  source;  items  of  deduction 
claimed  under  section  B  of  the  Statute;  amount  of  specific 
exemption,  if  any,  claimed  under  section  C  of  the  Statute; 
and  all  items  of  income  upon  which  tax  has  been  withheld 
at  the  source.  See  Treasury  Regulations  15,  16  and  17,  and 
forms  in  last  part  of  this  book.  Forms  for  withholding, 
T.  D.  1973  and  1976;  foreign  agents,  T.  D.  1977;  banks 
withholding,  T.  D.  1986  and  T.  D.  2258;  nonresident  aliens, 
T.  D.  1988. 

H54.  Protests  of  Taxpayer.  All  allowances  for  deduc- 
tions and  exemptions  must  be  asked  for  by  the  taxpayer,  and 
in  case  of  a  person  whose  return  is  made  by  a  withholding 
agent  or  another,  such  person  must  file  either  with  the  Col- 
lector or  the  agent  a  written  demand  for  the  exemptions 
thirty  days  before  the  return  is  due  to  be  made.  (T.  E.  41, 
42,  60.)  If  such  demand  should  not  be  made  in  due  time, 
or  in  case  of  any  taxes  which  were  paid  and  not  legally  due, 
the  recourse  is  an  appeal  to  the  Commissioner  of  Internal 
Revenue,  in  accordance  with  section  3220  of  the  Revised 
Statutes.  A  protest  against  assessment  can  be  made  before 
collection  of  the  tax  in  the  same  way.  The  Commissioner  of 
Internal  Revenue  is  authorized  to  refund  "all  taxes  errone- 
ously or  illegally  assessed  or  collected,  all  penalties  collected 
without  authority,  and  all  taxes  that  appear  to  be  unjustly 
assessed  or  excessive  in  amount  or  in  any  manner  wrongfully 
collected,"  and  to  pay  to  any  collector  or  deputy  the  amount 
recovered  against  him  in  any  suit  brought  against  him  for 
anything  done  in  performance  of  his  official  duty.  The  Com- 
missioner apparently  has  full  discretion,  except  that  with  re- 


Analysis  37 

gard  to  penalties  incurred  he  cannot  remit  them  if  they  were 
assessed  and  collected  according  to  the  law.  (Revised  Stat- 
utes, section  3220,  and  T.  D.  herein  2015.)  Section  3224 
of  the  Revised  Statutes  of  the  United  States  prescribes  that 
"no  suit  for  the  purpose  of  restraining  the  assessment  or  col- 
lection of  any  tax  shall  be  maintained  in  any  court."  This 
means,  of  course,  that  an  injunction  against  a  Collector  of 
Internal  Revenue  is  not  possible.  Tax  illegally  withheld  is 
to  be  returned.  T.  D.  2131.  The  procedure  for  any  wrong 
done  to  the  taxpayer  is  by  appealing  first  to  the  Commis- 
sioner, and  after  that,  but  not  before,  suit  can  be  brought  in 
the  Federal  court  for  the  recovery  of  the  alleged  illegal  tax 
that  was  collected.  (R.  S.  3226.)  Both  the  appeal  to  the 
Commissioner  and  the  suit  are  limited  to  two  years  from  the 
date  the  cause  of  action  accrued.  (R.  S.  3226  and  3227.) 
The  legal  limit  for  collecting  tax  is  three  years  after  the  re- 
turn was  due  to  be  made.  (St.  E.)  Penalties,  1J40.  Assess- 
ment, 1f44. 

If55.  License  for  Foreign  Collections.  This  provision  ap- 
plies to  the  collection  of  coupons,  checks,  bills  of  exchange, 
etc.,  representing  interest  due  by  bonds,  mortgages  and  other 
obligations  issued  in  foreign  countries,  and  the  real  source 
of  payment  of  which  is  in  a  foreign  country.  It  applies  to 
any  "handling"  of  the  coupons,  etc.,  for  profit,  by  way  of  pur- 
chase, sale  or  collection  or  otherwise.  All  persons,  firms  or 
corporations  undertaking  the  collection  of  such  income  for 
profit  are  required  by  law  to  obtain  a  license  from  the  Com- 
missioner of  Internal  Revenue.  Application  for  the  license 
will  be  made  to  the  Collector  for  the  district  in  which  the 
applicant  has  his  place  of  business.  The  Collector  will  issue 
the  license  without  charge,  and  it  will  continue  in  force  until 
revoked  or  canceled.  If  the  Collector  is  not  satisfied  as  to 
the  entire  responsibility  of  the  applicant,  he  may  require  a 
bond  with  sureties  equal  to  the  estimated  amount  of  tax  due 
to  be  withheld  by  the  applicant  during  one  year.  The  person 
so  licensed  will  make  regular  reports  to  the  Collector  of  all 
items  collected  bv  him  in  such  business.     Failure  to  obtain 


38  Federal  Income  Tax 

a  license  or  to  comply  with  the  regulations  is  punishable  by 
a  fine  not  exceeding  $5,000  or  imprisonment  not  exceeding 
one  year,  or  both.  See  Statute,  section  E,  Treasury  Regula- 
tions 54  to  62,  and  T.  D.  2023,  amending  T.  R.  58.  See  also 
T.  D.  2090,  "Income." 

1f56.  Patents  and  Patent  Bights.  The  income  from  the 
use  of  a  patented  article  or  from  the  rentals  from  rights 
therein  is  a  part  of  the  gross  income,  and  is  taxable.  The 
allowance  for  depreciation  (1(26)  of  the  value  of  a  patent  is 
one-seventeenth  of  its  cost  for  each  year,  as  the  term  is  seven- 
teen years.  (T.  R.  137.)  If  the  patent  was  purchased  from 
the  originator,  then  the  cost  represented  is  the  amount  of  the 
purchase.  If  it  remains  in  the  hands  of  the  original  owner 
the  cost  is  the  amount  of  the  fees,  expenses,  etc.,  in  securing 
the  patent  from  the  Government.  Each  year  one-seventeenth 
of  its  value  as  capital  is  gone,  and  that  part  is  allowed  as  a 
deduction. 

157.  Corporation  Bookkeeping.  By  Treasury  Regula- 
tions 161,  182,  and  183,  it  is  provided  that  corporations,  in 
order  to  estimate  their  income,  must  necessarily  take  an  an- 
nual inventory  or  its  equivalent.  A  complete  physical  inven- 
tory is  desired,  but  where  it  is  not  possible  an  equivalent  in- 
ventory will  be  accepted.  An  equivalent  inventory  is  an  in- 
ventory of  materials,  supplies,  and  merchandise  on  hand, 
taken  from  the  books  of  the  corporation.  No  particular  sys- 
tem of  bookkeeping  is  required,  but  some  system  is  necessary 
by  which  the  return  of  income  can  be  verified.  The  annual 
balance  sheet  or  report  to  stockholders  should  show  the  same 
amount  of  net  profits  as  that  reported  as  net  income  in  the 
return  of  the  income.  The  books  of  a  corporation  shall  be 
open  to  inspection  on  order  of  the  Commissioner  of  Internal 
Revenue.  (T.  R.  186.)  The  books  are  assumed  to  show  the 
facts  as  to  income.  (T.  R.  183.)  Corporations,  1fl5.  Pow- 
ers of  Collectors,  Tf42. 

If 5  8.  Individual  Exemption.  Section  C  of  the  Statute 
prescribes  the  "specific"  exemption  for  individuals.  This 
specific  exemption  is  $3,000  for  an  unmarried  person,  or 


Analysis  39 

$4,000  for  a  married  person.  The  $4,000  exemption  applies 
to  a  married  person  only  while  living  with  husband  or  wife; 
and  if  both  have  incomes,  only  one  exemption  is  allowed. 
(1)52.)  This  specific  exemption  applies  only  to  persons.  A 
corporation  must  pay  the  tax  on  all  of  its  net  income.  The 
exemption  is  from  the  "net"  income.  (1120.)  This  means 
that  after  determining  the  net  income  this  part  of  it  is  not 
subjeet  to  tax.  The  allowance  of  this  exemption  is  sup- 
posedly fox  necessary  living  expenses,  and,  consequently, 
there  is  no  other  allowance  for  personal  or  family  expenses, 
but  the  cost  of  such  is  to  be  included  as  part  of  the  income. 
(1f2l.)  No  person  is  required  to  make  a  return  of  his  income 
unless  the  "net"  income  exceeds  $3,000.  (Statute,  section 
D.)  The  individual  is  left  to  determine  whether  or  not  his 
net  income  does  amount  to  that  much,  but  in  case  of  doubt 
the  Collector  may  require  him  to  make  the  return.  Even 
when  the  return  is  made,  the  person,  if  married,  does  not  pay 
any  tax  unless  the  net  income  amounts  to  $4,000.  See  Treas- 
ury Regulations,  Articles  9  and  10.  When  a  person's  tax  is 
paid  by  a  fiduciary  (H33)  or  withholding  agent  (1J32),  writ- 
ten demand  for  the  specific  exemption  must  be  made  thirty 
days  before  March  1,  to  either  the  agent  or  the  Collector.  An 
American  woman  who  marries  a  foreigner  takes  the  nation- 
ality of  her  husband  and  cannot  claim  the  exemption.  (T.  D. 
2090,  "Citizenship.") 


PART  II 

THE  COMPLETE  STATUTE  LAW 


For  detailed  references  see  General  Index. 

The  Statute,  when  referred  to  in  cross  references,  is  ab- 
breviated as  "St."  It  is  given  in  the  following  pages  without 
accompanying  comment,  as  the  reader,  for  explanation  of  any 
part  of  it,  is  expected  to  refer  to  the  Index  or  Analysis.  Prac- 
tically every  sentence  in  the  Statute  is  covered  in  the  58 
paragraphs  of  the  Analysis,  and  for  convenience  the  lettered 
sections  of  the  Statute  with  reference  to  the  parallel  para- 
graph of  the  Analysis  (abbreviated  as  A)  are  here  given: 

St.  A.  Levying  tax,  A  16. 

St.  B.  Deductions,  A  18-27. 

St.  C.  $3,000  exemption,  A  58. 

St.  D.  Returns,  A  17,  37. 

St.  E.  Assessment,  withholding,  A  44,  32. 

St.  F.  Penalties,  A  40. 

St.  G.  Corporation  Tax,  A  15. 

St.  H.  "State"  construed. 

St.  I.  Collection  Laws,  A  40,  41,  42,  54. 

St.  J.  Receipts. 

St.  K.  Jurisdiction  of  Courts. 

St.  L.  Laws  made  applicable. 

St.  M.  Philippines,  Porto  Rico. 

St.  S.  Excise  Tax,  A  11. 


INCOME  TAX  LAW 

ISeotion  2,  Act  October  3,  1913] 


Normal  Tax,  How  Levied. 

Subdivision  1.  That  there  shall  be  levied,  assessed,  col- 
lected and  paid  annually  upon  the  entire  net  income  arising 
or  accruing  from  all  sources  in  the  preceding  calendar  year 
to  every  citizen  of  the  United  States,  whether  residing  at 
home  or  abroad,  and  to  every  person  residing  in  the  United 
States,  though  not  a  citizen  thereof,  a  tax  of  1  per  centum  per 
annum  upon  such  income,  except  as  hereinafter  provided ;  and 
a  like  tax  shall  be  assessed,  levied,  collected,  and  paid  annu- 
ally upon  the  entire  net  income  from  all  property  owned 
and  of  every  business,  trade,  or  profession  carried  on  in  the 
United  States  by  persons  residing  elsewhere. 

Additional  Tax  on  Net  Incomes  in  Excess  of  $20,000. 

Subdivision  2.  In  addition  to  the  income  tax  provided 
under  this  section  (herein  referred  to  as  the  normal  income 
tax)  there  shall  be  levied,  assessed,  and  collected  upon  the 
net  income  of  every  individual  an  additional  income  tax 
(herein  referred  to  as  the  additional  tax)  of  1  per  centum 
per  annum  upon  the  amount  by  which  the  total  net  income 
exceeds  $20,000  and  does  not  exceed  $50,000,  and  2  per 
centum  per  annum  upon  the  amount  by  which  the  total  net 
income  exceeds  $50,000  and  does  not  exceed  $75,000,  & 
per  centum  per  annum  upon  the  amount  by  which  the  total 
net  income  exceeds  $75,000  and  does  not  exceed  $100,000, 

4  per  centum  per  annum  upon  the  amount  by  which  the  total 
net  income  exceeds  $100,000  and  does  not  exceed  $250,000, 

5  per  centum  per  annum  upon  the  amount  by  which  the  total 
net  income  exceeds  $250,000  and  does  not  exceed  $500,000, 
and  6  per  centum  per  annum  upon  the  amount  by  which 
the  total  net  income  exceeds  $500,000.  All  the  provisions 
of  this  section  relating  to  individuals  who  are  chargeable 


44  Federal  Income  Tax 

with  the  normal  income  tax,  so  far  as  they  are  applicable 
and  are  not  inconsistent  with  this  subdivision  of  paragraph 
A,  shall  apply  to  the  levy,  assessment,  and  collection  of  the 
additional  tax  imposed  under  this  section. 

Personal  Return  of  Net  Income  to  be  Made  Annually. 

Every  person  subject  to  this  additional  tax  shall,  for  the 
purpose  of  its  assessment  and  collection,  make  a  personal  re- 
turn of  his  total  net  income  from  all  sources,  corporate  or 
otherwise,  for  the  preceding  calendar  year,  under  rules  and 
regulations  to  be  prescribed  by  the  Commissioner  of  Internal 
Bevenue  and  approved  by  the  Secretary  of  the  Treasury. 

Interest  in  Gains  and  Profits  of  Corporations  to  be  Included. 

For  the  purpose  of  this  additional  tax  the  taxable  income 
of  any  individual  shall  embrace  the  share  to  which  he  would 
be  entitled  of  the  gains  and  profits,  if  divided  or  distributed, 
whether  divided  or  distributed  or  not,  of  all  corporations, 
joint-stock  companies,  or  associations,  however  created  or 
organized,  formed  or  fraudulently  availed  of  for  the  pur- 
pose of  preventing  the  imposition  of  such  tax  through  the 
medium  of  permitting  such  gains  and  profits  to  accumulate 
instead  of  being  divided  or  distributed;  and  the  fact  that 
any  such  corporation,  joint-stock  company,  or  association  is 
a  mere  holding  company,  or  that  the  gains  and  profits  are  per- 
mitted to  accumulate  beyond  the  reasonable  needs  of  the 
business  shall  be  prima  facie  evidence  of  a  fraudulent  pur- 
pose to  escape  such  tax  ;  but  the  fact  that  the  gains  and  profits 
are  in  any  case  permitted  to  accumulate  and  become  surplus 
shall  not  be  construed  as  evidence  of  a  purpose  to  escape  the 
said  tax  in  such  case  unless  the  Secretary  of  the  Treasury 
shall  certify  that  in  his  opinion  such  accumulation  is  unrea- 
sonable for  the  purposes  of  the  business.  When  requested 
by  the  Commissioner  of  Internal  Eeveune,  or  any  district 
collector  of  internal  revenue,  such  corporation,  joint-stock 
company,  or  association  shall  forward  to  him  a  correct  state- 
ment of  such  profits  and  the  names  of  the  individuals  who 
would  be  entitled  to  the  same  if  distributed. 


Income  Tax  Law  45 

B 

Net  Income,  Items  Constituting  Same. 

That,  subject  only  to  such  exemptions  and  deductions  as 
are  hereinafter  allowed,  the  net  income  of  a  taxable  person 
shall  include  gains,  profits,  and  income  derived  from  sala- 
ries, wages,  or  compensation  for  personal  service  of  what- 
ever kind  and  in  whatever  form  paid,  or  from  professions, 
vocations,  businesses,  trade,  commerce,  or  sales,  or  dealings 
in  property,  whether  real  or  personal,  growing  out  of  the  own- 
ership or  use  of  or  interest  in  real  or  personal  property,  also 
from  interest,  rent,  dividends,  securities,  or  the  transaction  of 
any  lawful  business  carried  on  for  gain  or  profit,  or  gains  or 
profits,  and  income  derived  from  any  source  whatever,  in- 
cluding the  income  from  but  not  the  value  of  property  ac- 
quired by  gift,  bequest,  devise,  or  descent:  Provided,  That 
the  proceeds  of  life  insurance  policies  paid  upon  the  death 
of  the  person  insured  or  payments  made  by  or  credited  to 
the  insured,  on  life  insurance,  endowment,  or  annuity  con- 
tracts, upon  the  return  thereof  to  the  insured  at  the  maturity 
of  the  term  mentioned  in  the  contract,  or  upon  surrender  of 
contract,  shall  not  be  included  as  income. 

Deductions  Allowed  in  Computing  Net  Income  for  the 
Purpose  of  the  Normal  Tax. 

That  in  computing  net  income  for  the  purpose  of  the  nor- 
mal tax  there  shall  be  allowed  as  deductions:  First,  the 
necessary  expenses  actually  paid  in  carrying  on  any  business, 
not  including  personal,  living,  or  family  expenses;  second, 
all  interest  paid  within  the  year  by  a  taxable  person  on  in- 
debtedness; third,  all  National,  State,  county,  school,  and 
municipal  taxes  paid  within  the  year,  not  including  those 
assessed  against  local  benefits;  fourth,  losses  actually  sus- 
tained during  the  year,  incurred  in  trade  or  arising  from 
fires,  storms,  or  shipwreck,  and  not  compensated  for  by  in- 
surance or  otherwise ;  fifth,  debts  due  to  the  taxpayer  actually 
ascertained  to  be  worthless  and  charged  off  within  the  year  ; 
sixth,  a  reasonable  allowance  for  the  exhaustion,  wear  and 


46  Fedeeal  Income  Tax 

tear  of  property  arising  out  of  its  use  or  employment  in  the 
business,  not  to  exceed,  in  the  case  of  mines,  5  per  centum 
of  the  gross  value  at  the  mine  of  the  output  for  the  year  for 
which  the  computation  is  made,  but  no  deduction  shall  be 
made  for  any  amount  of  expense  of  restoring  property  or 
making  good  the  exhaustion  thereof  for  which  an  allowance 
is  or  has  been  made :  Provided,  That  no  deductions  shall  be 
allowed  for  any  amount  paid  out  for  new  buildings,  perma- 
nent improvements,  or  betterments,  made  to  increase  the 
value  of  any  property  or  estate;  seventh,  the  amount  re- 
ceived as  dividends  upon  the  stock  or  from  the  net  earnings 
of  any  corporation,  joint-stock  company,  association,  or  in- 
surance company  which  is  taxable  upon  its  net  income  as 
hereinafter  provided ;  eighth,  the  amount  of  income,  the  tax 
upon  which  has  been  paid  or  withheld  for  payment  at  the 
source  of  the  income,  under  the  provisions  of  this  section,  pro- 
vided that  whenever  the  tax  upon  the  income  of  a  person  is 
required  to  be  withheld  and  paid  at  the  source  as  hereinafter 
required,  if  such  annual  income  does  not  exceed  the  sum 
of  $3,000  or  is  not  fixed  or  certain,  or  is  indefinite  or  irreg- 
ular as  to  amount  or  time  of  accrual,  the  same  shall  not  be 
deducted  in  the  personal  return  of  such  person. 

Net  Income  of  Nonresidents,  from  Property  Owned  in 
the  United  States. 

The  net  income  from  property  owned  and  business  carried 
on  in  the  United  States  by  persons  residing  elsewhere  shall 
be  computed  upon  the  basis  prescribed  in  this  paragraph 
and  that  part  of  paragraph  G  of  this  section  relating  to  the 
computation  of  the  net  income  of  corporations,  joint-stock 
and  insurance  companies,  organized,  created,  or  existing  un- 
der the  laws  of  foreign  countries,  in  so  far  as  applicable. 

Interest  on  Obligations  of  State  or  of  United  States  and  Com- 
pensation of  Certain  United  States  Officers  Exempt  from 
Tax. 
That  in  computing  net  income  under  this  section  there 

shall  be  excluded  the  interest  upon  the  obligations  of  a  State 


Income  Tax  Law  47 

or  any  political  subdivision  thereof,  and  upon  the  obliga- 
tions of  the  United  States  or  its  possessions ;  also  the  com- 
pensation of  the  present  President  of  the  United  States  dur- 
ing the  term  for  which  he  has  been  elected,  and  of  the  judges 
of  the  supreme  and  inferior  courts  of  the  United  States  now 
in  office,  and  the  compensation  of  all  officers  and  employees 
of  a  State  or  any  political  subdivision  thereof  except  when 
such  compensation  is  paid  by  the  United  States  Government. 


Deduction  of  $8,000  Allowed  Each  Single  Person  and  $1,000 
Additional  for  Married  Man  and  Wife  Living  Together. 

That  there  shall  be  deducted  from  the  amount  of  the  net 
income  of  each  of  said  persons,  ascertained  as  provided  here- 
in, the  sum  of  $3,000,  plus  $1,000  additional  if  the  person 
making  the  return  be  a  married  man  with  a  wife  living  with 
him,  or  plus  the  sum  of  $1,000  additional  if  the  person  mak- 
ing the  return  be  a  married  woman  with  a  husband  living 
with  her;  but  in  no  event  shall  this  additional  exemption  of 
$1,000  be  deducted  by  both  a  husband  and  a  wife:  Provided, 
That  only  one  deduction  of  $4,000  shall  be  made  from  the 
aggregate  income  of  both  husband  and  wife  when  living  to- 
gether. 

D 

Period  for  Which  Tax  is  to  be  Computed. 

The  said  tax  shall  be  computed  upon  the  remainder  of  said 
net  income  of  each  person  subject  thereto,  accruing  during 
each  preceding  calendar  year  ending  December  thirty-first: 
Provided,  however,  That  for  the  year  ending  December 
thirty-first,  nineteen  hundred  and  thirteen,  said  tax  shall  be 
computed  on  the  net  income  accruing  from  March  first  to  De- 
cember thirty-first,  nineteen  hundred  and  thirteen,  both 
dates  inclusive,  after  deducting  five-sixths  only  of  the  specific 
exemptions  and  deductions  herein  provided  for. 


48  Federal  Income  Tax 

Return  to  be  Made  Under  Oath  by  Each  Person  Having 
a  Net  Income  of  $8,000  or  Over. 

On  or  before  the  first  day  of  March,  nineteen  hundred 
and  fourteen,  and  the  first  day  of  March  in  each  year  there- 
after, a  true  and  accurate  return,  under  oath  or  affirmation, 
shall  be  made  by  each  person  of  lawful  age,  except  as  herein- 
after provided,  subject  to  the  tax  imposed  by  this  section,  and 
having  a  net  income  of  $3,000  or  over  for  the  taxable  year, 
to  the  Collector  of  Internal  Revenue  for  the  district  in  which 
such  person  resides  or  has  his  principal  place  of  business, 
or,  in  the  case  of  a  person  residing  in  a  foreign  country,  in 
the  place  where  his  principal  business  is  carried  on  within 
the  United  States,  in  such  form  as  the  Commissioner  of 
Internal  Revenue,  with  the  approval  of  the  Secretary  of  the 
Treasury,  shall  prescribe,  setting  forth  specifically  the  gross 
amount  of  income  from  all  separate  sources,  and  from  the 
total  thereof  deducting  the  aggregate  items  or  expenses  and 
allowance  herein  authorized. 

Guardians,  Trustees,  etc.,  to  Make  Return  for  Persons 
for  Whom  They  Act. 

Guardians,  trustees,  executors,  administrators,  agents,  re- 
ceivers, conservators,  and  all  persons,  corporations,  or  asso- 
ciations acting  in  any  fiduciary  capacity,  shall  make  and 
render  a  return  of  the  net  income  of  the  person  for  whom 
they  act,  subject  to  this  tax,  coming  into  their  custody  or 
control  and  management,  and  be  subject  to  all  the  provisions 
of  this  section  which  apply  to  individuals :  Provided,  That  a 
return  made  by  one  of  two  or  more  joint  guardians,  trus- 
tees, executors,  administrators,  agents,  receivers,  and  con- 
servators, or  other  persons  acting  in  a  fiduciary  capacity, 
filed  in  the  district  where  such  person  resides,  or  in  the  dis- 
trict where  the  will  or  other  instrument  under  which  he  acts 
is  recorded,  under  such  regulations  as  the  Secretary  of  the 
Treasury  may  prescribe,  shall  be  a  sufficient  compliance  with 
the  requirements  of  this  paragraph. 


Income  Tax  Law  49 

Persons,  Firms,  etc.,  Having  Control  of  Determinable 
Income  Payable  to  Others. 

And  also  all  persons,  firms,  companies,  copartnerships,  cor- 
porations, joint-stock  companies  or  associations,  and  insur- 
ance companies,  except  as  hereinafter  provided,  in  whatever 
capacity  acting,  having  the  control,  receipt,  disposal,  or  pay- 
ment of  fixed  or  determinable  annual  or  periodical  gains, 
profits,  and  income  of  another  person  subject  to  tax,  shall  in 
behalf  of  such  person  deduct  and  withhold  from  the  pay- 
ment an  amount  equivalent  to  the  normal  income  tax  upon 
the  same  and  make  and  render  a  return,  as  aforesaid,  but 
separate  and  distinct,  of  the  portion  of  the  income  of  each 
person  from  which  the  normal  tax  has  been  thus  withheld, 
and  containing  also  the  name  and  address  of  such  person  or 
stating  that  the  name  and  address  or  the  address,  as  the  case 
may  be,  are  unknown:  Provided,  That  the  provision  re- 
quiring the  normal  tax  of  individuals  to  be  withheld  at  the 
source  of  the  income  shall  not  be  construed  to  require  any 
of  such  tax  to  be  withheld  prior  to  the  first  day  of  November, 
nineteen  hundred  and  thirteen. 

No  Return  Required  Unless  Income  Exceeds  $3,000. 

Provided  further,  That  in  either  case  above  mentioned 
no  return  of  income  not  exceeding  $3,000  shall  be  required. 

Interest  in  Partnership  Profits  to  be  Included  in  Return. 

Provided  further,  That  any  persons  carrying  on  busi- 
ness in  partnership  shall  be  liable  for  income  tax  only  in 
their  individual  capacity,  and  the  share  of  the  profits  of  a 
partnership  to  which  any  taxable  partner  would  be  entitled 
if  the  same  were  divided,  whether  divided  or  otherwise,  shall 
be  returned  for  taxation  and  the  tax  paid,  under  the  pro- 
visions of  this  section,  and  any  such  firm,  when  requested 
by  the  Commissioner  of  Internal  Revenue,  or  any  district 
collector,  shall  forward  to  him  a  correct  statement  of  such 
profits  and  the  names  of  the  individuals  who  would  be  en- 
titled to  the  same,  if  distributed. 
4 


50  Federal  Income  Tax 

Dividends  on  Stock,  When  to  he  Excluded  from  Return. 

Provided  further,  That  persons  liable  for  the  normal  in- 
come tax  only,  on  their  own  account  or  in  behalf  of  another, 
shall  not  be  required  to  make  return  of  the  income  derived 
from  dividends  on  the  capital  stock  or  from  the  net  earnings 
of  corporations,  joint-stock  companies  or  associations,  and 
insurance  companies  taxable  upon  their  net  income  as  here- 
inafter provided.  Any  person  for  whom  return  has  been 
made  and  the  tax  paid,  or  to  be  paid  as  aforesaid,  shall  not 
be  required  to  make  a  return  unless  such  person  has  other 
net  income,  but  only  one  deduction  of  $3,000  shall  be  made 
in  the  case  of  any  such  person. 

Returns  to  be  Verified  by  Oath,  and  Amended  Returns  May 
be  Required  by  Collector. 

The  collector  or  deputy  collector  shall  require  every  list 
to  be  verified  by  the  oath  or  affirmation  of  the  party  ren- 
dering it.  If  the  collector  or  deputy  collector  have  reason 
to  believe  that  the  amount  of  any  income  returned  is  under- 
stated, he  shall  give  due  notice  to  the  person  making  the  re- 
turn to  show  cause  why  the  amount  of  the  return  should  not 
be  increased,  and  upon  proof  of  the  amount  understated 
may  increase  the  same  accordingly. 

Appeals  from  Decision  of  Collector. 

If  dissatisfied  with  the  decision  of  the  collector,  such  per- 
son may  submit  the  case,  with  all  the  papers,  to  the  Commis- 
sioner of  Internal  Eevenue  for  his  decision,  and  may  fur- 
nish sworn  testimony  of  witnesses  to  prove  any  relevant 
facts. 

E 

Assessments,  Notice,  and  Payments  of. 

That  all  assessments  shall  be  made  by  the  Commissioner 
of  Internal  Eevenue  and  all  persons  shall  be  notified  of  the 
amount  for  which  they  are  respectively  liable  on  or  before 
the  first  day  of  June  of  each  successive  year,  and  said  as- 
sessments shall  be  paid  on  or  before  the  thirtieth  day  of  June, 


Income  Tax  Law  51 

except  in  cases  of  refusal  or  neglect  to  make  such  return 
and  in  cases  of  false  or  fraudulent  returns,  in  which  cases 
the  Commissioner  of  Internal  Revenue  shall,  upon  the  dis- 
covery thereof,  at  any  time  within  three  years  after  said 
return  is  due,  make  a  return  upon  information  obtained  as 
provided  for  in  this  section  or  by  existing  law,  and  the  as- 
sessment made  by  the  Commissioner  of  Internal  Revenue 
thereon  shall  be  paid  by  such  person  or  persons  immediately 
upon  notification  of  the  amount  of  such  assessment;  and  to 
any  sum  or  sums  due  and  unpaid  after  the  thirtieth  day  of 
June  in  any  year,  and  for  ten  days  after  notice  and  demand 
thereof  by  the  collector,  there  shall  be  added  the  sum  of  5 
per  centum  on  the  amount  of  tax  unpaid,  and  interest  at  the 
rate  of  1  per  centum  per  month  upon  said  tax  from  the  time 
the  same  became  due,  except  from  the  estates  of  insane,  de- 
ceased, or  insolvent  persons. 

Persons,  Firms,  etc.,  Withholding  Normal  Tax  on 
Behalf  of  Others. 
All  persons,  firms,  copartnerships,  companies,  corpora- 
tions, joint-stock  companies  or  associations,  and  insurance 
companies,  in  whatever  capacity  acting,  including  lessees 
or  mortgagors  of  real  or  personal  property,  trustees  acting 
in  any  trust  capacity,  executors,  administrators,  agents,  re- 
ceivers, conservators,  employers,  and  all  officers  and  em- 
ployees of  the  United  States  having  the  control,  receipt,  cus- 
tody, disposal,  or  payment  of  interest,  rent,  salaries,  wages, 
premiums,  annuities,  compensation,  remuneration,  emolu- 
ments, or  other  fixed  or  determinable  annual  gains,  profits, 
and  income  of  another  person,  exceeding  $3,000  for  any 
taxable  year,  other  than  dividends  on  capital  stock,  or  from 
the  net  earnings  of  corporations  and  joint-stock  companies  or 
associations  subject  to  like  tax,  who  are  required  to  make 
and  render  a  return  in  behalf  of  another,  as  provided  here- 
in, to  the  collector  of  his,  her,  or  its  district,  are  hereby 
authorized  and  required  to  deduct  and  withhold  from  such 
annual  gains,  profits,  and  income  such  sum  as  will  be  suffi- 
cient to  pay  the  normal  tax  imposed  thereon  by  this  section. 


52  Federal  Income  Tax 

and  shall  pay  to  the  officer  of  the  United  States  Government 
authorized  to  receive  the  same;  and  they  are  each  hereby 
made  personally  liable  for  such  tax. 

Notice  Must  be  Filed  in  Advance  for  Claims  for  Exemption 
Under  Paragraph  C. 

In  all  cases  where  the  income  tax  of  a  person  is  withheld 
and  deducted  and  paid  or  to  be  paid  at  the  source,  as  afore- 
said, such  person  shall  not  receive  the  benefit  of  the  deduction 
and  exemption  allowed  in  paragraph  C  of  this  section  ex- 
cept by  an  application  for  refund  of  the  tax  unless  "he  shall, 
not  less  than  thirty  days  prior  to  the  day  on  which  the  re- 
turn of  his  income  is  due,  file  with  the  person  who  is  re- 
quired to  withhold  and  pay  tax  for  him,  a  signed  notice  in 
writing  claiming  the  benefit  of  such  exemption,  and  there- 
upon no  tax  shall  be  withheld  upon  the  amount  of  such 
exemption. 

Penalty  for  Filing  False  Claim. 

Provided,  That  if  any  person  for  the  purpose  of  obtaining 
any  allowance  or  reduction  by  virtue  of  a  claim  for  such 
exemption,  either  for  himself  or  for  any  other  person,  know- 
ingly makes  any  false  statement  or  false  or  fraudulent  rep- 
resentation, he  shall  be  liable  to  a  penalty  of  $300. 

Notice  Must  be  Filed  in  Advance  for  Claim  for  Deduction. 

Nor  shall  any  person  under  the  foregoing  conditions  be  al- 
lowed the  benefit  of  any  deduction  provided  for  in  subsec- 
tion B  of  this  section  unless  he  shall,  not  less  than  thirty 
days  prior  to  the  day  on  which  the  return  of  his  income  is 
due,  either  file  with  the  person  who  is  required  to  withhold 
and  pay  tax  for  him  a  true  and  correct  return  of  his  annual 
gains,  profits,  and  income  from  all  other  sources,  and  also  the 
deductions  asked  for,  and  the  showing  thus  made  shall  then 
become  a  part  of  the  return  to  be  made  in  his  behalf  by  the 
person  required  to  withhold  and  pay  the  tax,  or  likewise  make 
application  for  deductions  to  the  collector  of  the  district  in 
which  return  is  made  or  to  be  made  for  him. 


Income  Tax  Law  53 

Returns  for  Minors,  Insane  Persons,  etc.,  by  Whom  Made. 

Provided  further,  That  if  such  person  is  a  minor  or  an 
insane  person,  or  is  absent  from  the  United  States,  or  is 
unable  owing  to  serious  illness  to  make  the  return  and  appli- 
cation above  provided  for,  the  return  and  application  may  be 
made  for  him  or  her  by  the  person  required  to  withhold  and 
pay  the  tax,  he  making  oath  under  the  penalties  of  this  Act 
that  he  has  sufficient  knowledge  of  the  affairs  and  property 
of  his  beneficiary  to  enable  him  to  make  a  full  and  com- 
plete return  for  him  or  her,  and  that  the  return  and  appli- 
cation made  by  him  are  full  and  complete. 

Normal  Tax  to  be  Deducted  and  Withheld  at  Source  of 
Income  from  Bonds,  etc.,  of  Corporations. 

Provided  further,  That  the  amount  of  the  normal  tax 
hereinbefore  imposed  shall  be  deducted  and  withheld  from 
fixed  and  determinable  annual  gains,  profits,  and  income  de- 
rived from  interest  upon  bonds  and  mortgages,  or  deeds  of 
trust  or  other  similar  obligations  of  corporations,  joint-stock 
companies  or  associations,  and  insurance  companies,  whether 
payable  annually  or  at  shorter  or  longer  periods,  although 
such  interest  does  not  amount  to  $3,000,  subject  to  the  pro- 
visions of  this  section  requiring  the  tax  to  be  withheld  at  the 
source  and  deducted  from  annual  income  and  paid  to  the 
Government. 

Dividends  on  Stocks,  or  Interest  on  Foreign  Bonds, 
Mortgages,  etc. 

And  likewise  the  amount  of  such  tax  shall  be  deducted  and 
withheld  from  coupons,  checks,  or  bills  of  exchange  for  or 
in  payment  of  interest  upon  bonds  of  foreign  countries  and 
upon  foreign  mortgages  or  like  obligations  (not  payable  in 
the  United  States),  and  also  from  coupons,  checks,  or  bills 
of  exchange  for  or  in  payment  of  any  dividends  upon  the 
stock  or  interest  upon  the  obligations  of  foreign  corpora- 
tions, associations,  and  insurance  companies  engaged  in  bus- 
iness in  foreign  countries ;  and  the  tax  in  each  case  shall  be 


54  Fedeeal  Income  Tax 

withheld  and  deducted  for  and  in  behalf  of  any  person  subject 
to  the  tax  hereinbefore  imposed,  although  such  interest,  divi- 
dends, or  other  compensation  does  not  exceed  $3,000,  by  any 
banker  or  person  who  shall  sell  or  otherwise  realize  coupons, 
checks,  or  bills  of  exchange  drawn  or  made  in  payment  of 
any  such  interest  or  dividends  (not  payable  in  the  United 
States),  and  any  person  who  shall  obtain  payment  (not  in 
the  United  States),  in  behalf  of  another  of  such  dividends 
and  interest  by  means  of  coupons,  checks,  or  bills  of  exchange, 
and  also  any  dealer  in  such  coupons  who  shall  purchase  the 
same  for  any  such  dividends  or  interest  (not  payable  in  the 
United  States),  otherwise  than  from  a  banker  or  another 
dealer  in  such  coupons;  but  in  each  case  the  benefit  of  the 
exemption  and  the  deduction  allowable  under  this  section  may 
be  had  by  complying  with  the  foregoing  provisions  of  this 
paragraph. 

License  to  be  Obtained  by  Persons,  etc.,  Engaged  in  Business 
of  Collecting  Foreign  Payments  of  Interest,  etc. 
All  persons,  firms,  or  corporations  undertaking  as  a  mat- 
ter of  business  or  for  profit  the  collection  of  foreign  pay- 
ments of  such  interest  or  dividends  by  means  of  coupons, 
checks,  or  bills  of  exchange  shall  obtain  a  license  from  the 
Commissioner  of  Internal  Revenue,  and  shall  be  subject  to 
such  regulations  enabling  the  Government  to  ascertain  and 
verify  the  due  withholding  and  payment  of  the  income  tax 
required  to  be  withheld  and  paid  as  the  Commissioner  of 
Internal  Revenue,  with  the  approval  of  the  Secretary  of  the 
Treasury,  shall  prescribe. 

Penalty  for  Failure  to  Obtain  License. 
And  any  person  who  shall  knowingly  undertake  to  collect 
such  payments  as  aforesaid  without  having  obtained  a  license 
therefor,  or  without  complying  with  such  regulations,  shall 
be  deemed  guilty  of  a  misdemeanor  and  for  each  offense  be 
fined  in  a  sum  not  exceeding  $5,000,  or  imprisoned  for  a 
term  not  exceeding  one  year,  or  both,  in  the  discretion  of  the 
court. 


Income  Tax  Law  55 

Liability  for  Tax  Not  Affected  by  Any  Contract  Entered 
Into  After  Passage  of  Act. 

Nothing  in  this  section  shall  be  construed  to  release  a 
taxable  person  from  liability  for  income  tax,  nor  shall  any 
contract  entered  into  after  this  Act  takes  effect  be  valid  in 
regard  to  any  Federal  income  tax  imposed  upon  a  person 
liable  to  such  payment. 

The  tax  herein  imposed  upon  annual  gains,  profits,  and 
income  not  falling  under  the  foregoing  and  not  returned 
and  paid  by  virtue  of  the  foregoing  shall  be  assessed  by  per- 
sonal return  under  rules  and  regulations  to  be  prescribed  by 
the  Commissioner  of  Internal  Eevenue  and  approved  by  the 
Secretary  of  the  Treasury. 

Deductions  at  Source  Apply  to  Normal  Tax  Only. 

The  provisions  of  this  section  relating  to  the  deduction 
and  payment  of  the  tax  at  the  source  of  income  shall  only 
apply  to  the  normal  tax  hereinbefore  imposed  upon  indi- 
viduals. 

F 

Penalty  for  Refusal  or  Neglect  to  Make  Required  Return  or 
for  Making  False  Return. 
That  if  any  person,  corporation,  joint-stock  company,  as- 
sociation, or  insurance  company  liable  to  make  the  return 
or  pay  the  tax  aforesaid  shall  refuse  or  neglect  to  make  a  re- 
turn at  the  time  or  times  hereinbefore  specified  in  each  year, 
such  person  shall  be  liable  to  a  penalty  of  not  less  than  $20 
nor  more  than  $1,000. 

Penalty  for  Making  False  or  Fraudulent  Return. 

Any  person  or  any  officer  of  any  corporation  required  by 
law  to  make,  render,  sign,  or  verify  any  return  who  makes 
any  false  or  fraudulent  return  or  statement  with  intent  to 
defeat  or  evade  the  assessment  required  by  this  section  to  be 
made  shall  be  guilty  of  a  misdemeanor,  and  shall  be  fined 
not  exceeding  $2,000  or  be  imprisoned  not  exceeding  one 
year,  or  both,  at  the  discretion  of  the  court,  with  the  costs 
of  prosecution. 


56  Federal  Income  Tax 


Normal  Tax  to  be  Assessed  and  Paid  on  Annual  Net  Income 
of  Corporations,  Joint-Stock  Companies  and  Associa- 
tions. 

(a)  That  the  normal  tax  hereinbefore  imposed  upon  in- 
dividuals likewise  shall  be  levied,  assessed,  and  paid  annually 
upon  the  entire  net  income  arising  or  accruing  from  all 
sources  during  the  preceding  calendar  year  to  every  corpor- 
ation, joint-stock  company  or  association,  and  every  insur- 
ance company,  organized  in  the  United  States,  no  matter 
how  created  or  organized,  not  including  partnerships ;  but  if 
organized,  authorized,  or  existing  under  the  laws  of  any 
foreign  country,  then  upon  the  amount  of  net  income  accru- 
ing from  business  transacted  and  capital  invested  within  the 
United  States  during  such  year. 

Tax  Not  to  Apply  to  Certain  Organizations  Specified. 

Provided,  however,  That  nothing  in  this  section  shall  ap- 
ply to  labor,  agricultural,  or  horticultural  organizations,  or 
to  mutual  savings  banks  not  having  a  capital  stock  repre- 
sented by  shares,  or  to  fraternal  beneficiary  societies,  orders, 
or  associations  operating  under  the  lodge  system  or  for  the 
exclusive  benefit  of  the  members  of  a  fraternity  itself  operat- 
ing under  the  lodge  system,  and  providing  for  the  payment 
of  life,  sick,  accident,  and  other  benefits  to  the  members  of 
such  societies,  orders,  or  associations  and  dependents  of  such 
members,  nor  to  domestic  building  and  loan  associations,  nor 
to  cemetery  companies,  organized  and  operated  exclusively 
for  the  mutual  benefit  of  their  members,  nor  to  any  corpora- 
tion or  association  organized  and  operated  exclusively  for  re- 
ligious, charitable,  scientific,  or  educational  purposes,  no 
part  of  the  net  income  of  which  inures  to  the  benefit  of  any 
private  stockholder  or  individual,  nor  to  business  leagues, 
nor  to  chambers  of  commerce  or  boards  of  trade,  not  organ- 
ized for  profit  or  no  part  of  the  net  income  of  which  inures 
to  the  benefit  of  the  private  stockholder  or  individual ;  nor 


Income  Tax  Law  57 

to  any  civic  league  or  organization  not  organized  for  profit, 
but  operated  exclusively  for  the  promotion  of  social  welfare. 

Income  Derived  from  Public  Utilities  or  Governmental 
Functions  Accruing  to  States,  Territories,  etc. 

Provided  further,  That  there  shall  not  be  taxed  under 
this  section  any  income  derived  from  any  public  utility  or 
from  the  exercise  of  any  essential  governmental  function 
accruing  to  any  State,  Territory,  or  the  District  of  Columbia, 
or  any  political  subdivision  of  a  State,  Territory,  or  the  Dis- 
trict of  Columbia,  nor  any  income  accruing  to  the  govern- 
ment of  the  Philippine  Islands  or  Porto  Rico,  or  of  any 
political  subdivision  of  the  Philippine  Islands  or  Porto 
Rico :  Provided,  That  whenever  any  State,  Territory,  or  the 
District  of  Columbia,  or  any  political  subdivision  of  a  State 
or  Territory,  has,  prior  to  the  passage  of  this  Act,  entered 
in  good  faith  into  a  contract  with  any  person  or  corporation 
the  object  and  purpose  of  which  is  to  acquire,  construct,  op- 
erate or  maintain  a  public  utility,  no  tax  shall  be  levied  un- 
der the  provisions  of  this  Act  upon  the  income  derived  from 
the  operation  of  such  public  utility,  so  far  as  the  payment 
thereof  will  impose  a  loss  or  burden  upon  such  State,  Terri- 
tory, or  the  District  of  Columbia,  or  a  political  subdivision 
of  a  State  or  Territory. 

Exemptions  Not  to  Apply  to  Gains  or  Profits  Derived  from. 
Contracts  by  Persons  or  Corporations. 

But  this  provision  is  not  intended  to  confer  upon  such 
person  or  corporation  any  financial  gain  or  exemption  or  to 
relieve  such  person  or  corporation  from  the  payment  of  a  tax 
as  provided  for  in  this  section  upon  the  part  or  portion  of 
the  said  income  to  which  such  person  or  corporation  shall  be 
entitled  under  such  contract. 

Net  Income  of  Corporations,  Joint-Stock  Companies,  etc., 
How  Ascertained. 

(b)  Such  net  income  shall  be  ascertained  by  deducting 
from  the  gross  amount  of  the  income  of  such  corporation, 


58  Federal  Income  Tax 

joint-stock  company  or  association,  or  insurance  company,  re- 
ceived within  the  year  from  all  sources,  (first)  all  the  ordi- 
nary and  necessary  expenses  paid  within  the  year  in  the 
maintenance  and  operation  of  its  business  and  properties,  in- 
cluding rentals  or  other  payments  required  to  be  made  as  a 
condition  to  the  continued  use  or  possession  of  property ; 
(second)  all  losses  actually  sustained  within  the  year  and 
not  compensated  by  insurance  or  otherwise,  including  a  rea- 
sonable allowance  for  depreciation  by  use,  wear  and  tear  of 
property,  if  any;  and  in  the  case  of  mines  a  reasonable  al- 
lowance for  depletion  of  ores  and  all  other  natural  deposits, 
not  to  exceed  5  per  centum  of  the  gross  value  at  the  mine  of 
the  output  for  the  year  for  which  the  computation  is  made-, 
and  in  case  of  insurance  companies  the  net  addition,  if  any, 
required  by  law  to  be  made  within  the  year  to  reserve  funds 
and  the  sums  other  than  dividends  paid  within  the  year  on 
policy  and  annuity  contracts. 

Mutual  Fire  Insurance  Companies. 

Provided,  That  mutual  fire  insurance  companies  requiring 
their  members  to  make  premium  deposits  to  provide  for  losses 
and  expenses  shall  not  return  as  income  any  portion  of  the 
premium  deposits  returned  to  their  policyholders,  but  shall 
return  as  taxable  income  all  income  received  by  them  from 
all  other  sources  plus  such  portions  of  the  premium  deposits 
as  are  retained  by  the  companies  for  purposes  other  than  the 
payment  of  losses  and  expenses  and  reinsurance  reserves. 

Mutual  Marine  Insurance  Companies,  Life  Insurance 
Companies. 

Provided  further,  That  mutual  marine  insurance  compa- 
nies shall  include  in  their  return  of  gross  income  gross  pre- 
miums collected  and  received  by  them,  less  amounts  paid  for 
reinsurance,  but  shall  be  entitled  to  include  in  deductions 
from  gross  income  amounts  repaid  to  policyholders  on  account 
of  premiums  previously  paid  by  them  and  interest  paid 
upon  such  amounts  between  the  ascertainment  thereof  and 
the  payment  thereof,  and  life  insurance  companies  shall  not 


Income  Tax  Law  59 

include  as  income  in  any  year  such  portion  of  any  actual 
premium  received  from  any  individual  policyholder  as  shall 
have  been  paid  back  or  credited  to  such  individual  policy- 
holder, or  treated  as  an  abatement  of  premium  of  such  indi- 
vidual policyholder,  within  such  year;  (third)  the  amount 
of  interest  accrued  and  paid  within  the  year  on  its  indebted- 
ness to  an  amount  of  such  indebtedness  not  exceeding  one- 
half  of  the  sum  of  its  interest-bearing  indebtedness  and  its 
paid-up  capital  stock  outstanding  at  the  close  of  the  year,  or 
if  no  capital  stock,  the  amount  of  interest  paid  within  the 
year  on  an  amount  of  its  indebtedness  not  exceeding  the 
amount  of  capital  employed  in  the  business  at  the  close  of 
the  year :  Provided,  That  in  case  of  indebtedness  wholly  se- 
cured by  collateral  the  subject  of  sale  in  ordinary  business  of 
such  corporation,  joint-stock  company,  or  association,  the 
total  interest  secured  and  paid  by  such  company,  corporation, 
or  association  within  the  year  on  any  such  indebtedness  may 
be  deducted  as  a  part  of  its  expense  of  doing  business. 

Bonds  Issued  with  Guaranty  That  Interest  Shall  be  Free 
from  Taxation. 

Provided  further,  That  in  the  case  of  bonds  or  other  in- 
debtedness, which  have  been  issued  with  a  guaranty  that  the 
interest  payable  thereon  shall  be  free  from  taxation,  no  de- 
duction for  the  payment  of  the  tax  herein  imposed  shall  be 
allowed. 

Interest  on  Deposits  May  be  Deducted  from  Gross  Income. 

And  in  the  case  of  a  bank,  banking  association,  loan  or 
trust  company,  interest  paid  within  the  year  on  deposits  or 
on  moneys  received  for  investment  and  secured  by  interest- 
bearing  certificates  of  indebtedness  issued  by  such  bank,  bank- 
ing association,  loan  or  trust  company;  (fourth)  all  sums 
paid  by  it  within  the  year  for  taxes  imposed  under  the  author- 
ity of  the  United  States  or  of  any  State  or  Territory  thereof, 
or  imposed  by  the  Government  of  any  foreign  country. 


60  Federal  Income  Tax 

Foreign  Corporations,  etc.,  Income  from  Business  in 
United  States. 

Provided,  That  in  the  case  of  a  corporation,  joint-stock 

company  or  association,   or  insurance  company,   organized, 

authorized,  or  existing  under  the  laws  of  any  foreign  country, 

such  net  income  shall  be  ascertained  by  deducting  from  the 

gross  amount  of  its  income  accrued  within  the  year  from 

business  transacted  and  capital  invested  within  the  United 

States, 

Ordinary  Expenses,  Rentals,  etc. 

First.  All  the  ordinary  and  necessary  expenses  actually 

paid  within  the  year  out  of  earnings  in  the  maintenance  and 

operation  of  its  business  and  property  within  the  United 

States,  including  rentals  or  other  payments  required  to  be 

made  as  a  condition  to  the  continued  use  or  possession  of 

property. 

Losses  and  Depreciation. 

Second.  All  losses  actually  sustained  within  the  year  in 
business  conducted  by  it  within  the  United  States  and  not 
compensated  by  insurance  or  otherwise,  including  a  reason- 
able allowance  for  depreciation  by  use,  wear  and  tear  of 
property,  if  any,  and  in  the  case  of  mines  a  reasonable  allow- 
ance for  depletion  of  ores  and  all  other  natural  deposits,  not 
to  exceed  5  per  centum  of  the  gross  value  at  the  mine  of  the 
output  for  the  year  for  which  the  computation  is  made. 

Reserve  Funds  of  Insurance  Companies. 
And  in  case  of  insurance  companies  the  net  addition,  if 
any,  required  by  law  to  be  made  within  the  year  to  reserve 
funds  and  the  sums  other  than  dividends  paid  within  the 
year  on  policy  and  annuity  contracts. 

Mutual  Fire  Insurance. 
Provided  further,  That  mutual  fire  insurance  companies 
requiring  their  members  to  make  premium  deposits  to  pro- 
vide for  losses  and  expenses  shall  not  return  as  income  any 
portion  of  the  premium  deposits  returned  to  their  policy- 
holders, but  shall  return  as  taxable  income  all  income  re- 


Income  Tax  Law  61 

ceived  by  them  from  all  other  sources  plus  such  portions  of  the 
premium  deposits  as  are  retained  by  the  companies  for  pur- 
poses other  than  the  payment  of  losses  and  expenses  and  re- 
insurance reserves. 

Mutual  Marine  Insurance. 

Provided  further,  That  mutual  marine  insurance  compa- 
nies shall  include  in  their  return  of  gross  income  gross  pre- 
miums collected  and  received  by  them  less  amounts  paid  for 
reinsurance,  but  shall  be  entitled  to  include  in  deductions 
from  gross  income  amounts  repaid  to  policyholders  on  ac- 
count of  premiums  previously  paid  by  them,  and  interest 
paid  upon  such  amounts  between  the  ascertainment  thereof 
and  the  payment  thereof  and  life  insurance  companies  shall 
not  include  as  income  in  any  year  such  portion  of  any  ac- 
tual premium  received  from  any  individual  policyholder  as 
shall  have  been  paid  back  or  credited  to  such  individual  pol- 
icyholder, or  treated  as  an  abatement  of  premium  of  such 
individual  policyholder,  within  such  year. 

Interest  Accruing  and  Paid  During  the  Year  on 
Indebtedness. 
Third.  The  amount  of  interest  accrued  and  paid  within 
the  year  on  its  indebtedness  to  an  amount  of  such  indebted- 
ness not  exceeding  the  proportion  of  one-half  of  the  sum  of 
its  interest-bearing  indebtedness  and  its  paid-up  capital  stock 
outstanding  at  the  close  of  the  year,  or,  if  no  capital  stock, 
the  capital  employed  in  the  business  at  the  close  of  the  year 
which  the  gross  amount  of  its  income  for  the  year  from  bus- 
iness transacted  and  capital  invested  within  the  United 
States  bears  to  the  gross  amount  of  its  income  derived  from 
all  sources  within  and  without  the  United  States. 

Bonds  Whose  Makers  Have  Agreed  to  Pay  Interest  Without 
Tax  Deduction. 

Provided,  That  in  the  case  of  bonds  or  other  indebtedness 
which  have  been  issued  with  a  guaranty  that  the  interest  pay- 
able thereon  shall  be  free  from  taxation,  no  deduction  for 
the  payment  of  the  tax  herein  imposed  shall  be  allowed. 


62  Federal  Income  Tax 

Taxes. 
Fourth.  All  sums  paid  by  it  within  the  year  for  taxes  im- 
posed under  the  authority  of  the  United  States  or  of  any 
State  or  Territory  thereof  or  the  District  of  Columbia.  In 
the  case  of  assessment  insurance  companies,  whether  domestic 
or  foreign,  the  actual  deposit  of  sums  with  State  or  Terri- 
torial officers,  pursuant  to  law,  as  additions  to  guarantee  or 
reserve  funds  shall  be  treated  as  being  payments  required 
by  law  to  reserve  funds. 

Tax  to  be  Computed  on  Net  Income  Accruing  Each 
Calendar  Year. 

(c)  The  tax  herein  imposed  shall  be  computed  upon  its 
entire  net  income  accrued  within  each  preceding  calendar 
year  ending  December  thirty-first :  Provided,  however,  That 
for  the  year  ending  December  thirty-first,  nineteen  hundred 
and  thirteen,  said  tax  shall  be  imposed  upon  its  entire  net 
income  accrued  within  that  portion  of  said  year  from  March 
first  to  December  thirty-first,  both  dates  inclusive,  to  be  as- 
certained by  taking  five-sixths  of  its  entire  net  income  for 
said  calendar  year. 

But  Fiscal  Year  Other  Than  Calendar  May  be  Designated 
by  Corporations. 
Provided  further,  That  any  corporation,  joint-stock  com- 
pany or  association,  or  insurance  company  subject  to  this 
tax  may  designate  the  last  day  of  any  month  in  the  year  as 
the  day  of  the  closing  of  its  fiscal  year  and  shall  be  entitled 
to  have  the  tax  payable  by  it  computed  upon  the  basis  of  the 
net  income  ascertained  as  herein  provided  for  the  year  end- 
ing on  the  day  so  designated  in  the  year  preceding  the  date 
of  assessment  instead  of  upon  the  basis  of  the  net  income  for 
the  calendar  year  preceding  the  date  of  assessment ;  and  it 
shall  give  notice  of  the  day  it  has  thus  designated  as  the 
closing  of  its  fiscal  year  to  the  collector  of  the  district  in 
which  its  principal  business  office  is  located  at  any  time 
not  less  than  thirty  days  prior  to  the  date  upon  which  its 
annual  return  shall  be  filed. 


Income  Tax  Law  63 

Returns,  When  to  be  Rendered. 
All  corporations,  joint-stock  companies  or  associations,  and 
insurance  companies  subject  to  the  tax  herein  imposed,  com- 
puting taxes  upon  the  income  of  the  calendar  year,  shall, 
on  or  before  the  first  day  of  March,  nineteen  hundred  and 
fourteen,  and  the  first  day  of  March  in  each  year  thereafter, 
and  all  corporations,  joint-stock  companies  or  associations, 
and  insurance  companies,  computing  taxes  upon  the  income 
of  a  fiscal  year  which  it  may  designate  in  the  manner  herein- 
before provided,  shall  render  a  like  return  within  sixty  days 
after  the  close  of  its  said  fiscal  year,  and  within  sixty  days 
after  the  close  of  its  fiscal  year  in  each  year  thereafter,  or  in 
the  case  of  a  corporation,  joint-stock  company  or  association, 
or  insurance  company,  organized  or  existing  under  the  laws  of 
a  foreign  country,  in  the  place  where  its  principal  business 
is  located  within  the  United  States,  in  such  form  as  the  Com- 
missioner of  Internal  Revenue,  with  the  approval  of  the 
Secretary  of  the  Treasury,  shall  prescribe,  shall  render  a 
true  and  accurate  return  under  oath  or  affirmation  of  its 
president,  vice  president,  or  other  principal  officer,  and  its 
treasurer  or  assistant  treasurer,  to  the  collector  of  internal 
revenue  for  the  district  in  which  it  has  its  principal  place  of 
business,  setting  forth : 

Paid-up  Capital. 
First.    The  total  amount  of  its  paid-up  capital  stock  out- 
standing, or,  if  no  capital  stock,  its  capital  employed  in  bus- 
iness, at  the  close  of  the  year. 

Bonded  Indebtedness. 
Second.    The  total  amount  of  its  bonded  and  other  in- 
debtedness at  the  close  of  the  year. 

Gross  Income. 
Third.  The  gross  amount  of  its  income,  received  during 
such  year  from  all  sources,  and  if  organized  under  the  laws 
of  a  foreign  country  the  gross  amount  of  its  income  re- 
ceived within  the  year  from  business  transacted  and  capital 
invested  within  the  United  States. 


64  Federal  Income  Tax 

Ordinary  Expenses  of  Operation  and  Maintenance. 
Fourth.  The  total  amount  of  all  its  ordinary  and  necessary 
expenses  paid  out  of  earnings  in  the  maintenance  and  oper- 
ation of  the  business  and  properties  of  such  corporation, 
joint-stock  company  or  association,  or  insurance  company, 
within  the  year,  stating  separately  all  rentals  or  other  pay- 
ments required  to  be  made  as  a  condition  to  the  continued  use 
or  possession  of  property,  and  if  organized  under  the  laws 
of  a  foreign  country  the  amount  so  paid  in  the  maintenance 
and  operation  of  its  business  within  the  United  States. 

Losses  and  Depreciation. 

Fifth.  The  total  amount  of  all  losses  actually  sustained 
during  the  year  and  not  compensated  by  insurance  or  other- 
wise, stating  separately  any  amounts  allowed  for  deprecia- 
tion of  property,  and  in  case  of  insurance  companies  the  net 
addition,  if  any,  required  by  law  to  be  made  within  the 
year  to  reserve  funds  and  the  siims  other  than  dividends  paid 
within  the  year  on  policy  and  annuity  contracts. 

Certain  Premium  Deposits  Not  to  be  Returned  as  Taxable 

Income. 

Provided  further,  That  mutual  fire  insurance  companies 
requiring  their  members  to  make  premium  deposits  to  pro- 
vide for  losses  and  expenses  shall  not  return  as  income  any 
portion  of  the  premium  deposits  returned  to  their  policy- 
holders, but  shall  return  as  taxable  income  all  income  re- 
ceived by  them  from  all  other  sources  plus  such  portions  of 
the  premium  deposits  as  are  retained  by  the  companies  for 
purposes  other  than  the  payment  of  losses  and  expenses  and 
reinsurance  reserves. 

Premiums,  Reinsurance,  etc. 

Provided  further,  That  mutual  marine  insurance  compa- 
nies shall  include  in  their  return  of  gross  income  gross  pre- 
miums collected  and  received  by  them  less  amounts  paid  for 
reinsurance,  but  shall  be  entitled  to  include  in  deductions 
from  gross  income  amounts  repaid  to  policyholders  on  ae- 


Income  Tax  Law  65 

count  of  premiums  previously  paid  by  them,  and  interest 
paid  upon  such  amounts  between  the  ascertainment  thereof 
and  the  payment  thereof,  and  life  insurance  companies  shall 
not  include  as  income  in  any  year  such  portion  of  any  actual 
premium  received  from  any  individual  policyholder  as  shall 
have  been  paid  back  or  credited  to  such  individual  policy- 
holder, or  treated  as  an  abatement  of  premium  of  such  in- 
dividual policyholder,  within  such  year ; 

Foreign  Corporations  Doing  Business  in  the  United  States. 
And  in  case  of  a  corporation,  joint-stock  company  or  asso- 
ciation, or  insurance  company,  organized  under  the  laws  of  a 
foreign  country,  all  losses  actually  sustained  by  it  during 
the  year  in  business  conducted  by  it  within  the  United  States, 
not  compensated  by  insurance  or  otherwise,  stating  sepa- 
rately any  amounts  allowed  for  depreciation  of  property,  and 
in  case  of  insurance  companies  the  net  addition,  if  any,  re- 
quired by  law  to  be  made  within  the  year  to  reserve  funds 
and  the  sums  other  than  dividends  paid  within  the  year  on 
policy  and  annuity  contracts. 

Mutual  Fire  Insurance  Companies. 

Provided  further,  That  mutual  fire  insurance  companies 
requiring  their  members  to  make  premium  deposits  to  pro- 
vide for  losses  and  expenses  shall  not  return  as  income  any 
portion  of  the  premium  deposits  returned  to  their  policyhold- 
ers, but  shall  return  as  taxable  income  all  income  received 
by  them  from  all  other  sources  plus  such  portions  of  the  pre- 
mium deposits  as  are  retained  by  the  companies  for  pur- 
poses other  than  the  payment  of  losses  and  expenses  and  re- 
insurance reserves. 

Mutual  Marine  Insurance  Companies. 

Provided  further,  That  mutual  marine  insurance  com- 
panies shall  include  in  their  return  of  gross  income  gross  pre- 
miums collected  and  received  by  them  less  amounts  paid  for 
reinsurance,  but  shall  be  entitled  to  include  in  deductions 
from  gross  income  amounts  repaid  to  policyholders  on  ac- 
5 


66  Federal  Income  Tax 

count  of  premiums  previously  paid  by  them  and  interest 
paid  upon  such  amounts  between  the  ascertainment  thereof 
and  the  payment  thereof,  and  life  insurance  companies  shall 
not  include  as  income  in  any  year  such  portion  of  any  actual 
premium  received  from  any  individual  policyholder  as  shall 
have  been  paid  back  or  credited  to  such  individual  policy- 
holder, or  treated  as  an  abatement  of  premium  of  such  indi- 
vidual policyholder,  within  such  year. 

What  Interest  on  Bonded  Indebtedness  May  be  Deducted. 

Sixth.  The  amount  of  interest  accrued  and  paid  within 
the  year  on  its  bonded  or  other  indebtedness  not  exceeding 
one-half  of  the  sum  of  its  interest-bearing  indebtedness  and 
its  paid-up  capital  stock,  outstanding  at  the  close  of  the  year, 
or,  if  no  capital  stock,  the  amount  of  interest  paid  within  the 
year  on  an  amount  of  indebtedness  not  exceeding  the  amount 
of  capital  employed  in  the  business  at  the  close  of  the  year, 
and  in  the  case  of  a  bank,  banking  association,  or  trust  com- 
pany, stating  separately  all  interest  paid  by  it  within  the 
year  on  deposits ; 

Interest   on  Indebtedness   of  Foreign  Corporations. 

Or  in  case  of  a  corporation,  joint-stock  company  or  associa- 
tion, or  insurance  company,  organized  under  the  laws  of  a 
foreign  country,  interest  so  paid  on  its  bonded  or  other  in- 
debtedness to  an  amount  of  such  bonded  or  other  indebted- 
ness not  exceeding  the  proportion  of  its  paid-up  capital  stock 
outstanding  at  the  close  of  the  year,  or,  if  no  capital  stock, 
the  amount  of  capital  employed  in  the  business  at  the  close 
of  the  year,  which  the  gross  amount  of  its  income  for  the 
year  from  business  transacted  and  capital  invested  within 
the  United  States  bears  to  the  gross  amount  of  its  income 
derived   from   all   sources  within   and  without  the   United 

Taxes  Paid. 
Seventh.  The  amount  paid  by  it  within  the  year  for  taxes 
imposed  under  the  authority  of  the  United  States  and  sepa- 
rately the  amount  so  paid  by  it  for  taxes  imposed  by  the 
Government  of  any  foreign  country. 


Income  Tax  Law  67 

Net  Income  to  be  Shown  on  Return. 
Eighth.  The  net  income  of  such  corporation,  joint-stock 
company  or  association,  or  insurance  company,  after  mak- 
ing the  deductions  in  this  subsection  authorized.  All  such 
returns  shall  as  received  be  transmitted  forthwith  by  the 
collector  to  the  Commissioner  of  Internal  Eevenue. 

Assessments  to  be  Made,  and  Notice  to  be  Given. 

All  assessments  shall  be  made  and  the  several  corpora- 
tions, joint-stock  companies  or  associations,  and  insurance 
companies  shall  be  notified  of  the  amount  for  which  they 
are  respectively  liable  on  or  before  the  first  day  of  June  of 
each  successive  year,  and  said  assessment  shall  be  paid  on 
or  before  the  thirtieth  day  of  June. 

When  False  Return  Has  Been  Rendered  and  Facts  Are  De- 
tected within  Three  Years,  Commissioner  May  Make  New 
Assessment. 

Provided,  That  every  corporation,  joint-stock  company  or 
association,  and  insurance  company,  computing  taxes  upon 
the  income  of  the  fiscal  year  which  it  may  designate  in  the 
manner  hereinbefore  provided,  shall  pay  the  taxes  due  under 
its  assessment  within  one  hundred  and  twenty  days  after  the 
date  upon  which  it  is  required  to  file  its  list  or  return  of  in- 
come for  assessment;  except  in  cases  of  refusal  or  neglect  to 
make  such  return,  and  in  cases  of  false  or  fraudulent  returns, 
in  which  cases  the  Commissioner  of  Internal  Revenue  shall, 
upon  the  discovery  thereof,  at  any  time  within  three  years 
after  said  return  is  due,  make  a  return  upon  information  ob- 
tained as  provided  for  in  this  section  or  by  existing  law,  and 
the  assessment  made  by  the  Commissioner  of  Internal  Rev- 
enue thereon  shall  be  paid  by  such  corporation,  joint-stock 
company  or  association,  or  insurance  company  immediately 
upon  notification  of  the  amount  of  such  assessment ; 

Penalty  and  Interest  Incurred  by  Failure  to  Pay  Tax  Within 
Prescribed  Time. 
And  to  any  sum  or  sums  due  and  unpaid  after  the  thirtieth 
day  of  June  in  any  year,  or  after  one  hundred  and  twenty 


68  Federal  Income  Tax 

days  from  the  date  on  which  the  return  of  income  is  re- 
quired to  be  made  by  the  taxpayer,  and  after  ten  days  no- 
tice and  demand  thereof  by  the  collector,  there  shall  be  added 
the  sum  of  5  per  centum  on  the  amount  of  tax  unpaid  and 
interest  at  the  rate  of  1  per  centum  per  month  upon  said  tax 
from  the  time  the  same  becomes  due. 

Returns  Rendered  to  he  Filed  with  Commissioner  of 
Internal  Revenue. 

(d)  When  the  assessment  shall  be  made,  as  provided  in 
this  section,  the  returns,  together  with  any  corrections  there- 
of which  may  have  been  made  by  the  commissioner,  shall  be 
filed  in  the  office  of  the  Commissioner  of  Internal  Revenue 
and  shall  constitute  public  records  and  be  open  to  inspection 
as  such. 

Returns  to  be  Open  to  Inspection  Under  Certain  Conditions. 

Provided,  That  any  and  all  such  returns  shall  be  open  to 
inspection  only  upon  the  order  of  the  President,  under  rules 
and  regulations  to  be  prescribed  by  the  Secretary  of  the 
Treasury  and  approved  by  the  President:  Provided  fur- 
ther. That  the  proper  officers  of  any  State  imposing  a  general 
income  tax  may,  upon  the  request  of  the  Governor  thereof, 
have  access  to  said  returns  or  to  an  abstract  thereof,  show- 
ing the  name  and  income  of  each  such  corporation,  joint- 
stock  company,  association  or  insurance  company,  at  such 
times  and  in  such  manner  as  the  Secretary  of  the  Treasury 
may  prescribe. 

Penalty  to  Corporations,  etc.,  for  Refusing  or  Neglecting  to 
File  Required  Return. 

If  any  of  the  corporations,  joint-stock  companies  or  asso- 
ciations, or  insurance  companies  aforesaid  shall  refuse  or 
neglect  to  make  a  return  at  the  time  or  times  hereinbefore 
specified  in  each  year,  or  shall  render  a  false  or  fraudulent 
return,  such  corporation,  joint-stock  company  or  association, 
or  insurance  company  shall  be  liable  to  a  penalty  of  not  ex- 
ceeding $10,000. 


Income  Tax  Law  69 


H 


That  the  word  "State"  or  "United  States"  when  used  in 
this  section  shall  be  construed  to  include  any  Territory, 
Alaska,  the  District  of  Columbia,  Porto  Rico,  and  the  Phil- 
ippine Islands,  when  such  construction  is  necessary  to  carry 
out  its  provisions. 

I 

That  sections  thirty-one  hundred  and  sixty-seven,  thirty- 
one  hundred  aud  seventy-two,  thirty-one  hundred  and  seventy- 
three,  and  thirty-one  hundred  and  seventy-six  of  the  Revised 
Statutes  of  the  United  States  as  amended  are  hereby  amended 
so  as  to  read  as  follows: 

"Sec.  3167.  It  shall  be  unlawful  for  any  collector,  dep- 
uty collector,  agent,  clerk,  or  other  officer  or  employee  of 
the  United  States  to  divulge  or  to  make  known  in  any  man- 
ner whatever  not  provided  by  law  to  any  person  the  opera- 
tions, style  of  work,  or  apparatus  of  any  manufacturer  or 
producer  visited  by  him  in  the  discharge  of  his  official  du- 
ties ;  or  the  amount  or  source  of  income,  profits,  losses,  ex- 
penditures, or  any  particular  thereof,  set  forth  or  disclosed 
in  any  income  return  by  any  person  or  corporation,  or  to 
permit  any  income  return  or  copy  thereof  or  any  book  con- 
taining any  abstract  or  particulars  thereof  to  be  seen  or  ex- 
amined by  any  person  except  as  provided  by  law ;  and  it 
shall  be  unlawful  for  any  person  to  print  or  publish  in  any 
manner  whatever  not  provided  by  law  any  income  return  or 
any  part  thereof  or  the  amount  or  source  of  income,  profits, 
losses,  or  expenditures  appearing  in  any  income  return ;  and 
any  offense  against  the  foregoing  provision  shall  be  a  misde- 
meanor and  be  punished  by  a  fine  not  exceeding  $1,000  or 
by  imprisonment  not  exceeding  one  year,  or  both,  at  the 
discretion  of  the  court;  and  if  the  offender  be  an  officer  or 
employee  of  the  United  States  he  shall  be  dismissed  from  of- 
fice and  be  incapable  thereafter  of  holding  any  office  under 
the  Government. 


70  Federal  Income  Tax 

"Sec.  3172.  Every  collector  shall,  from  time  to  time, 
cause  bis  deputies  to  proceed  through  every  part  of  his  dis- 
trict and  inquire  after  and  concerning  all  persons  therein 
who  are  liable  to  pay  any  internal-reveune  tax,  and  all  per- 
sons owning  or  having  the  care  and  management  of  any 
objects  liable  to  pay  any  tax,  and  to  make  a  list  of  such 
persons  and  enumerate  said  objects. 

"Sec.  3173.  It  shall  be  the  duty  of  any  person,  partner- 
ship, firm,  association,  or  corporation,  made  liable  to  any 
duty,  special  tax,  or  other  tax  imposed  by  law,  when  not  other- 
wise provided  for,  in  case  of  a  special  tax,  on  or  before  the 
thirty-first  day  of  July  in  each  year,  in  case  of  income  tax  on 
or  before  the  first  day  of  March  in  each  year,  and  in  other 
cases  before  the  day  on  which  the  taxes  accrue,  to  make  a 
list  or  return,  verified  by  oath  or  affirmation,  to  the  collector 
or  a  deputy  collector  of  the  district  where  located,  of  the 
articles  or  objects,  including  the  amount  of  annual  income 
charged  with  a  duty  or  tax,  the  quantity  of  goods,  wares,  and 
merchandise  made  or  sold  and  charged  with  a  tax,  the  several 
rates  and  aggregate  amount,  according  to  the  forms  and  regu- 
lations to  be  prescribed  by  the  Commissioner  of  Internal 
Revenue,  with  the  approval  of  the  Secretary  of  the  Treasury, 
for  which  such  person,  partnership,  firm,  association,  or  cor- 
poration is  liable:  Provided,  That  if  any  person  liable  to  pay 
any  duty  or  tax,  or  owning,  possessing,  or  having  the  care  or 
management  of  property,  goods,  wares,  and  merchandise, 
articles,  or  objects  liable  to  pay  any  duty,  tax,  or  license,  shall 
fail  to  make  and  exhibit  a  list  or  return  required  by  law,  but 
shall  consent  to  disclose  the  particulars  of  any  and  all  the 
property,  goods,  wares,  and  merchandise,  articles,  and  objects 
liable  to  pay  any  duty  or  tax,  or  any  business  or  occupation 
liable  to  pay  any  tax  as  aforesaid,  then  and  in  that  case  it 
shall  be  the  duty  of  the  collector  or  deputy  collector  to  make 
such  list  or  return,  which,  being  distinctly  read,  consented 
to,  and  signed  and  verified  by  oath  or  affirmation  by  the  per- 
son so  owning,  possessing,  or  having  the  care  and  manage- 
ment as  aforesaid,  may  be  received  as  the  list  of  such  per- 


Income  Tax  Law  71 

son :  Provided  further,  That  in  case  no  annual  list  or  return 
has  been  rendered  by  such  person  to  the  collector  or  deputy 
collector  as  required  by  law,  and  the  person  shall  be  absent 
from  his  or  her  residence  or  place  of  business  at  the  time  the 
collector  or  a  deputy  collector  shall  call  for  the  annual  list 
or  return,  it  shall  be  the  duty  of  such  collector  or  deputy  col- 
lector to  leave  at  such  place  of  residence  or  business,  with 
some  one  of  suitable  age  and  discretion,  if  such  be  present, 
otherwise  to  deposit  in  the  nearest  postofEce,  a  note  or  memo- 
randum addressed  to  such  person,  requiring  him  or  her  to 
render  to  such  collector  or  deputy  collector  the  list  or  return 
required  by  law  within  ten  days  from  the  date  of  such  note 
or  memorandum,  verified  by  oath  or  affirmation.  And  if  any 
person,  on  being  notified  or  required  as  aforesaid,  shall  refuse 
or  neglect  to  render  such  list  or  return  within  the  time  re- 
quired as  aforesaid,  or  whenever  any  person  who  is  required 
to  deliver  a  monthly  or  other  return  of  objects  subject  to  tax 
fails  to  do  so  at  the  time  required,  or  delivers  any  return 
which,  in  the  opinion  of  the  collector,  is  false  or  fraudulent, 
or  contains  any  undervaluation  or  understatement,  it  shall 
be  lawful  for  the  collector  to  summon  such  person,  or  any 
other  person  having  possession,  custody,  or  care  of  books  of 
account  containing  entries  relating  to  the  business  of  such 
person,  or  any  other  person  he  may  deem  proper,  to  appear 
before  him  and  produce  such  books,  at  a  time  and  place 
named  in  the  summons,  and  to  give  testimony  or  answer  in- 
terrogatories, under  oath,  respecting  any  objects  liable  to  tax 
or  the  returns  thereof.  The  collector  may  summon  any  per- 
son residing  or  found  within  the  State  in  which  his  district 
lies ;  and  when  the  person  intended  to  be  summoned  does  not 
reside  and  cannot  be  found  within  such  State,  he  may  enter 
any  collection  district  where  such  person  may  be  found  and 
there  make  the  examination  herein  authorized.  And  to  this 
end  he  may  there  exercise  all  the  authority  which  he  might 
lawfully  exercise  in  the  district  for  which  he  was  commis- 
sioned. 


72  Federal,  Income  Tax 

"Sec.  3176.  When  any  person,  corporation,  company,  or 
association  refuses  or  neglects  to  render  any  return  or  list  re- 
quired by  law,  or  renders  a  false  or  fraudulent  return  or  list, 
the  collector  or  any  deputy  collector  shall  make,  according  to 
the  best  information  which  he  can  obtain,  including  that  de- 
rived from  the  evidence  elicited  by  the  examination  of  the 
collector,  and  on  his  own  view  and  information,  such  list  or 
return,  according  to  the  form  prescribed,  of  the  income,  prop- 
erty, and  objects  liable  to  tax  owned  or  possessed  or  under 
the  care  or  management  of  such  person  or  corporation,  com- 
pany or  association,  and  the  Commissioner  of  Internal  Reve- 
nue shall  assess  all  taxes  not  paid  by  stamps,  including  the 
amount,  if  any,  due  for  special  tax,  income  or  other  tax,  and 
in  case  of  any  return  of  a  false  or  fraudulent  list  or  valuation 
intentionally  he  shall  add  100  per  centum  to  such  tax;  and 
in  case  of  a  refusal  or  neglect,  except  in  cases  of  sickness  or 
absence,  to  make  a  list  or  return,  or  to  verify  the  same  as 
aforesaid,  he  shall  add  50  per  centum  to  such  tax.  In  case 
of  neglect  occasioned  by  sickness  or  absence  as  aforesaid  the 
collector  may  allow  such  further  time  for  making  and  de- 
livering such  list  or  return  as  he  may  deem  necessary,  not 
exceeding  thirty  days.  The  amount  so  added  to  the  tax  shall 
be  collected  at  the  same  time  and  in  the  same  manner  as  the 
tax  unless  the  neglect  or  falsity  is  discovered  after  the  tax  has 
been  paid,  in  which  case  the  amount  so  added  shall  be  col- 
lected in  the  same  manner  as  the  tax;  and  the  list  or  return 
so  made  and  subscribed  by  such  collector  or  deputy  collector 
shall  be  held  prima  facie  good  and  sufficient  for  all  legal  pur- 
poses." 

J 

Receipts  for  Tax  Paid  to  he  Given  by  Collector. 

That  it  shall  be  the  duty  of  every  collector  of  internal  reve- 
nue, to  whom  any  payment  of  any  taxes  other  than  the  tax 
represented  by  an  adhesive  stamp  or  other  engraved  stamp  is 
made  under  the  provisions  of  this  section,  to  give  to  the  per- 
son making  such  payment  a  full  written  or  printed  receipt, 


Income  Tax  Law  73 

expressing  the  amount  paid  and  the  particular  account  for 
which  such  payment  was  made ;  and  whenever  such  payment 
is  made  such  collector  shall,  if  required,  give  a  separate  re- 
ceipt for  each  tax  paid  by  any  debtor,  on  account  of  payments 
made  to  ox  to  be  made  by  him  to  separate  creditors  in  such 
form  that  such  debtor  can  conveniently  produce  the  same 
separately  to  his  several  creditors  in  satisfaction  of  their  re- 
spective demands  to  the  amounts  specified  in  such  receipts; 
and  such  receipts  shall  be  sufficient  evidence  in  favor  of  such 
debtor  to  justify  him  in  withholding  the  amount  therein  ex- 
pressed from  his  next  payment  to  his  creditor ;  but  such  cred- 
itor may,  upon  giving  to  his  debtor  a  full  written  receipt, 
acknowledging  the  payment  to  him  of  whatever  sum  may  be 
actually  paid,  and  accepting  the  amount  of  tax  paid  as  afore- 
said (specifying  the  same)  as  a  further  satisfaction  of  the 
debt  to  that  amount,  require  the  surrender  to  him  of  such 
collector's  receipt. 

K 

Jurisdiction  Conferred  on  District  Courts  in  Compelling 
Attendance  of  Witnesses,  etc. 
That  jurisdiction  is  hereby  conferred  upon  the  district 
courts  of  the  United  States  for  the  district  within  which  any 
person  summoned  under  this  section  to  appear  to  testify  or 
to  produce  books  shall  reside,  to  compel  such  attendance,  pro- 
duction of  books,  and  testimony  by  appropriate  process. 


Laws  Relating  to   Assessment,  Remission,   Collection,   and 
Refunding  of  Taxes  Made  Applicable. 

That  all  administrative,  special,  and  general  provisions  of 
law,  including  the  laws  in  relation  to  the  assessment,  remis- 
sion, collection,  and  refund  of  iuternal-revenue  taxes  not  here- 
tofore specifically  repealed  and  not  inconsistent  with  the  pro- 
visions of  this  section,  are  hereby  extended  and  made  appli- 
cable to  all  the  provisions  of  this  section  and  to  the  tax  herein 
imposed. 


74  Federal  Income  Tax 

M 

Provisions  Relating  to  Income  Tax  Extended  to  Porto  Bic6 
and  Philippine  Islands. 

That  the  provisions  of  this  section  shall  extend  to  Porto 
Rico  and  the  Philippine  Islands:  Provided,  That  the  ad- 
ministration of  the  law  and  the  collection  of  the  taxes  im- 
posed in  Porto  Rico  and  the  Philippine  Islands  shall  be  by 
the  appropriate  internal-revenue  officers  of  those  govern- 
ments, and  all  revenues  collected  in  Porto  Rico  and  the 
Philippine  Islands  thereunder  shall  accrue  intact  to  the  gen- 
eral governments  thereof,  respectively:  and  Provided  fur- 
ther, That  the  jurisdiction  in  this  section  conferred  upon  the 
district  courts  of  the  United  States  shall,  so  far  as  the  Philip- 
pine Islands  are  concerued,  be  vested  in  the  courts  of  the  first 
instance  of  said  islands:  and  Provided  further,  That  noth- 
ing in  this  section  shall  be  held  to  exclude  from  the  computa- 
tion of  the  net  income  the  compensation  paid  any  official  by 
the  governments  of  the  District  of  Columbia,  Porto  Rico  and 
the  Philippine  Islands  or  the  political  subdivisions  thereof. 


Income  Subject  to  Special  Excise  Tax  Under  Act  of 
August  5,  1909. 

Section  4  (paragraph  S)  of  the  act  of  October  3,  1913, 
further  provides  *  *  *  That  a  special  excise  tax  with 
respect  to  the  carrying  on  or  doing  of  business,  equivalent  to 
1  per  centum  upon  their  entire  net  income,  shall  be  levied, 
assessed,  and  collected  upon  corporations,  joint-stock  com- 
panies or  associations,  and  insurance  companies,  of  the  char- 
acter described  in  section  thirty-eight  of  the  Act  of  August 
fifth,  nineteen  hundred  and  nine,  for  the  period  from  Janu- 
ary first  to  February  twenty-eighth,  nineteen  hundred  and 
thirteen,  both  dates  inclusive,  which  said  tax  shall  be  com- 
puted upon  one-sixth  of  the  entire  net  income  of  said  cor- 
porations, joint-stock  companies  or  associations,  and  insur- 


Income  Tax  Law  75 

ance  companies,  for  said  year,  said  net  income  to  be  ascer- 
tained in  accordance  with  the  provisions  of  subsection  G  of 
section  two  of  this  act. 

One  Return  May  be  Filed  for  Both  Special  Excise  and 
Income  Tax  for  Year  1913. 

Provided  further,  That  the  provisions  of  said  section 
thirty-eight  of  the  Act  of  August  fifth,  nineteen  hundred  and 
nine,  relative  to  the  collection  of  the  tax  therein  imposed  shall 
remain  in  force  for  the  collection  of  the  excise  tax  herein 
provided,  but  for  the  year  nineteen  hundred  and  thirteen  it 
shall  not  be  necessary  to  make  more  than  one  return  and 
assessment  for  all  the  taxes  imposed  herein  upon  said  cor- 
porations, joint-stock  companies  or  associations,  and  insur- 
ance companies,  either  by  way  of  income  or  excise,  which 
return  and  assessment  shall  be  made  at  the  times  and  in  the 
manner  provided  in  this  act.     *     *     * 


PART  III 


TREASURY  REGULATIONS 

Comprising  199  Articles,  Construing  the  Administrative 

Features  of  the  Law.    See  Index,  Part  VIII, 

for  Detailed  References 


PREFACE 

The  accompanying  regulations  embrace  the  various  ad- 
ministrative features  of  the  law  (sec.  2,  Act  of  Oct.  3,  1913) 
imposing  a  tax  on  incomes.  They  contain  instructions  rela- 
tive to  the  preparation  of  returns,  etc.,  and  are  designed  to 
assist  both  the  taxpayer  and  the  officers  charged  with  its  en- 
forcement in  complying  with  the  requirements  of  this  law. 

Liberal  construction  of  the  law  has  been  given  that  those 
charged  with  withholding  the  tax  at  the  source  may  not  do 
so  unnecessarily.  Withholding  agents  may  forward  evidences 
of  nonliability  to  payment,  when  such  evidences  are  received 
by  them,  to  collector  for  the  district  in  lieu  of  the  tax.  This 
will  relieve  them  of  the  necessity  of  withholding  such  tax. 

The  regulations  are  arranged  according  to  general  sub- 
jects, as  follows: 

Part   1.  Individual   income  returns   and  collections. 

Part  2.  Collections  at  the  source. 

A.  Bonds,  mortgages,  deeds  of  trust,  etc. 

B.  Bonds,  mortgages,   deeds  of  trust,  etc.,  by   first 

bank  or  collection  agency  where  certificates  of 
owners  are  not  filed. 

C.  Bonds,  mortgages,  dividends,  etc.,  of  foreign  cor- 

porations. 

D.  Salaries,  wages,  rent,  etc. 

E.  Fiduciaries. 

Part  3.  Relative  to  corporations,  joint-stock  companies  or 
associations,  and  insurance  companies. 

Part  4.  Assessment  and  collection. 

All  forms  of  certificates  herein  provided  shall  be  8  inches 
wide  and  3^  inches  from  top  to  bottom,  and  printed  on 
paper  of  substantial  weight  and  texture. 


REGULATIONS 


Regulations  concerning  the  tax  imposed  by  Section  2,  Act  of  October 
3,  1913,  on  net  income  of  Individuals,  Corporations,  Joint-Stock 
Companies,  Associations,  and  Insurance  Companies. 


Treasury  Department. 
Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  January  5,  1914. 

PART  I 

Individual  Income  Returns  and  Collections. 

Persons  Taxable. 
Article  1.    Section  2  of  the  above-named  act  imposes  a 
tax  of  1  per  centum  (designated  as  the  normal  tax)  on  net 
incomes   arising   or   accruing   from   all   sources   during   the 
preceding  calendar  year  to — 

(a)  Every  citizen  of  the  United  States,  whether  residing 
at  home  or  abroad ;  and 

(b)  Every  person  residing  in  the  United  States,  though 
not  a  citizen  thereof;  and 

(c)  From  all  property  owned  and  from  every  business, 
trade,  or  profession  carried  on  in  the  United  States,  by  a 
person  residing  elsewhere. 

Additional  or  Super  Tax. 

Art.  2.  Said  section  also  imposes  an  additional  tax  on 
all  net  incomes  of  individuals  exceeding  $20,000,  as  follows: 

1  per  cent  on  incomes  exceeding  $20,000  and  not  exceeding 

$50,000. 

2  per  cent  on  incomes  exceeding  $50,000  and  not  exceeding 

$75,000. 

3  per  cent  on  incomes  exceeding  $75,000  and  not  exceeding 

$100,000. 
6 


82  Federal  Income  Tax 

4  per  cent  on  incomes  exceeding  $100,000  and  not  exceeding 

$250,000. 
6  per  cent  on  incomes  exceeding  $250,000  and  not  exceeding 

$500,000. 
6  per  cent  on  incomes  exceeding  $500,000. 

Net  Income  Defined. 

Abt.  3.  The  Net  Income  shall  consist  of  the  total  gains, 
profits,  and  income  derived  from  all  sources  (designated 
as  gross  income)  less  deductions  numbered  first  to  sixth, 
inclusive,  specifically  enumerated  in  paragraph  B  of  the 
act    (See  Article  6.) 

Normal  Tax;  Upon  What  Computed. 

In  computing  the  taxable  income  for  the  purposes  of  the 
normal  tax  there  shall  be  deducted  from  the  net  income  as 
above  ascertained : 

(a)  The  amount  included  in  the  gross  income  received 
as  dividends  upon  the  stock  or  from  the  net  earnings  of  any 
corporation,  joint-stock  company,  association,  or  insurance 
company  which  is  taxable  upon  its  net  income ; 

(b)  The  amount  of  income  the  tax  upon  which  has  been 
paid  or  withheld  for  payment  at  the  source;  and 

(c)  The  specific  exemption  of  $3,000  or  $4,000,  as  the 
case  may  be,  except  in  the  case  of  nonresident  aliens. 

Oross  Income.     What  it  Includes. 

Abt.  4.  Gross  income  includes  all  gains,  profits,  and  in- 
come derived  from — 

(a)  Salaries,  wages,  or  compensation  for  personal  service 
of  whatever  kind  and  in  whatever  form  paid. 

(b)  Professions,  vocations,  business  (including  income 
from  copartnerships),  trade,  commerce,  or  sales  or  dealings 
in  property,  growing  out  of  the  ownership  or  use  of  or  in- 
terest in,  real  or  personal  property. 

(c)  Interest,  rent,  dividends,  securities,  or  transaction  of 
any  lawful  business  carried  on  for  gain  or  profit.  (See  Art. 
67  as  to  interest  on  deposits  and  certificates  of  deposit) 


Income  Tax  Regulations  83 

(d)  Gains  or  profits  and  income  derived  from  any  source 
whatever,  including  the  income  from,  but  not  the  value  of, 
property  acquired  by  gift,  bequest,  devise  or  descent. 

The  foregoing  is  held  to  include  all  income,  gains,  and 
profits  arising  or  accruing  from  all  sources  whatever  in  the 
calendar  year  for  which  the  return  is  made,  except  as  herein- 
after specifically  stated. 

Income  Exempt  from  Taxation. 

Aet.  5.  The  following  items  should  not  be  included  as 
gross  income: 

(a)  Value  of  property  acquired  by  gift,  bequest,  devise, 
or  descent  during  the  year. 

(b)  Proceeds  of  life  insurance  policies  paid  upon  the 
death  of  the  person  insured  to  beneficiaries,  or  payments 
made  by  or  credited  to  the  insured,  on  life  insurance,  en- 
dowment, or  annuity  contracts,  upon  the  return  thereof  to 
the  insured  at  the  maturity  of  the  term  mentioned  in  the 
contract,  but  this  shall  not  be  construed  to  mean  that  in- 
terest payments  to  beneficiaries  from  insurance  companies 
shall  not  be  included  as  income. 

(c)  Income  derived  from  interest  upon  the  obligations 
of  a  State  or  any  political  subdivision  thereof  and  upon  the 
obligations  of  the  United  States  or  its  possessions. 

(d)  The  compensation  of  the  President  of  the  United 
States  in  office  at  the  time  of  the  passage  of  the  act  of  Oc- 
tober 3,  1913,  during  the  term  for  which  he  was  elected,  and 
the  judges  of  the  Supreme  and  inferior  courts  of  the  United 
States  in  office  at  the  time  of  the  passage  of  the  act  of  Oc- 
tober 3,  1913; 

(e)  The  compensation  of  all  officers  and  employees  of  a 
State  or  any  political  subdivision  thereof,  including  public- 
school  teachers,  etc.  When  such  State  officers  or  employees 
are  compensated  by  the  United  States,  they  must  include 
such  income  as  taxable. 


84  Federal  Income  Tax 

Art.  6.  Deductions  and  exemptions  allowed  in  computing 
taxable  income  for  the  purposes  of  the  normal  tax. 

Deductions  Allowed  Under  Paragraph  B. 

Under  paragraph  B  the  following  items  are  to  be  de- 
ducted from  the  gross  income: 

1.  The  amount  of  necessary  expenses  actually  paid  for 
carrying  on  business,  but  not  including  business  expenses  of 
partnerships  and  not  including  personal,  living,  or  family 
expenses.  / 

2.  All  interest  paid  within  the  year  on  personal  indebted- 
ness of  the  taxpayer  incurred  in  the  conduct  of  business. 

3.  All  National,  State,  county,  school,  and  municipal 
taxes  paid  within  the  year  (not  including  those  assessed 
against  local  benefits). 

4.  Losses  actually  sustained  during  the  year  incurred  in 
trade  or  arising  from  fires,  storms,  or  shipwreck  and  not 
compensated  for  by  insurance  or  otherwise. 

5.  Debts  due  to  the  taxpayer  which  have  been  actually 
ascertained  to  be  worthless  and  charged  off  within  the  year. 

6.  Amount  representing  a  reasonable  allowance  for  the 
exhaustion,  wear,  and  tear  of  property  arising  out  of  its  use 
or  employment  in  the  business,  not  to  exceed,  in  the  case  of 
mines,  5  per  cent  of  the  gross  value  at  the  mine  of  the  output 
for  the  year  for  which  the  computation  is  made,  but  not  in- 
cluding the  expense  of  restoring  property  or  making  good  the 
exhaustion  thereof,  for  which  an  allowance  is  or  has  been 
made,  nor  for  any  amount  paid  for  new  buildings,  permanent 
improvements,  or  betterments,  made  to  increase  the  value  of 
any  property  or  estate. 

"Gross  Value  at  the  Mine"  Defined. 

The  term  "gross  value  at  the  mine,"  as  used  in  paragraphs  B  and 
G  of  section  2  of  the  act  of  October  3,  1913,  prescribing  a  limit  to 
the  amount  which  may  be  deducted  in  the  return  of  individuals  and 
corporations  as  depreciation  in  the  case  of  mines,  is  held  to  mean 
the  bona  fide  market  value  of  ore,  coal,  crude  oil,  and  gas  at  the 
mine  or  well,  where  such  value  is  established  by  actual  sales  at  the 
mine  or  well;  and  in  case  the  market  value  of  the  product  of  the 


Income  Tax  Regulations  85 

mine  or  well  is  established  at  some  other  place  than  at  the  mine  or 
well,  or  on  the  basis  of  the  bullion  or  metallic  value  of  the  ore,  then 
the  gross  value  at  the  mine  is  held  to  be  the  value  of  the  ore,  coal, 
oil,  or  gas  sold,  or  of  the  metal  produced,  less  transportation,  reduc- 
tion, and  smelting  charges. 

7.  The  amount  included  in  gross  income  received  as  div- 
idends upon  the  stock,  or  upon  the  net  earnings,  of  any  cor- 
poration, joint-stock  company,  association,  or  insurance  com- 
pany which  is  taxable  upon  its  net  income. 

8.  The  amount  of  income,  the  normal  tax  upon  which 
has  been  paid  or  withheld  for  payment  at  the  source  of  in- 
come. 

Gifts  or  Donations  Made  During  the  Year  Not  to  be 
Deducted. 

None  of  the  above  items  of  deduction  shall  include  money 
or  other  items  of  value  disposed  of  by  gift,  donation,  or 
endowment. 

Exemptions  Allowed  Under  Paragraph  C. 
Under  paragraph   C   the  personal   exemption   of  $3,000 
or  $4,000,  as  the  case  may  be,  is  to  be  deducted  from  the 
net  income  except  in  the  cases  of  nonresident  aliens.     (See 
Arts.  7,  9,  and  10.) 

Tax  Computed  on  the  Calendar  Year  Except  for  1913. 

Art.  7.  The  act  provides  that  the  said  normal  tax  shall 
be  computed  on  the  remainder  of  said  net  income  accruing 
during  each  preceding  calendar  year,  and  that  for  the  year 
ended  December  31,  1913,  said  tax  shall  be  computed  on 
the  net  income  accruing  from  March  1  to  December  31,  both 
dates  inclusive,  after  deducting  five-sixths  only  of  the  specific 
exemptions  and  deductions  authorized.  A  specific  exemp- 
tion, therefore,  of  $2,500  or  $3,333.33,  as  the  case  may  be, 
will  be  allowed  for  the  year  1913. 

Income  of  Nonresident  Aliens  Subject  to  the  Normal  Tax. 

Art.  8.  The  income  of  nonresident  aliens  subject  to  the 
normal  tax  of  1   per  cent  shall  consist  of  the  total  gains. 


86  Federal  Income  Tax 

profits,  and  income  derived  from  all  property  owned,  and 
from  every  business,  trade,  or  profession  carried  on  and  cap- 
ital invested  within  the  United  States  (to  be  designated  as 
gross  income),  less  deductions  (1  to  8,  inclusive)  specifically 
enumerated  in  paragraph  B  of  the  act  (see  Art.  6),  in  so 
far  as  said  deductions  relate  to  said  gains,  profits,  etc. 

Exemption  Under  Paragraph  C  Not  Allowed  in  Computing 
Taxable  Incomes  of  Nonresident  Aliens. 

The  specific  exemption  in  paragraph  C  of  the  act  can  not 
be  allowed  as  a  deduction  in  computing  the  normal  tax  of 
nonresident  aliens. 

Nonresident  Aliens  Subject  to  Additional  or  Surtax. 

Nonresident  aliens  are  subject  to  additional  or  surtax  the 
same  as  prescribed  in  the  case  of  citizens  of  the  United  States 
or  persons  residing  in  the  United  States. 

The  responsible  heads,  agents,  or  representatives  of  said 
nonresident  aliens  who  are  in  charge  of  the  property  owned 
or  business  carried  on  or  capital  invested  shall  make  full 
and  complete  return  of  said  income  and  shall  pay  the  tax 
as  provided  herein.     (See  T.  D.  2109.) 

Specific  Exemption  Allowed  to  Single  Person  or  Married 
Persons  Living  Apart. 

Art.  9.  Under  paragraph  C,  every  single  person  and  ev- 
ery married  person  not  living  with  husband  or  wife  in  the 
sense  below  defined,  who  has  a  net  income  exceeding  $3,000 
per  annum,  is  liable  to  pay  the  normal  tax  under  this  law, 
but  in  making  return  for  such  tax  such  person  may  claim  an 
exemption  of  $3,000  from  his  or  her  total  net  income. 

Specific  Exemption  Allowed  with  Respect  to  Aggregate 
Income  of  Husband  and  Wife. 

Art.  10.  Husband  and  wife  living  together  are  entitled 
to  an  exemption  of  $4,000  only  from  the  aggregate  net  in- 
come of  both,  which  may  be  deducted  in  making  the  return 
of  such  income  for  taxation.     However,  when  the  husband 


Income  Tax  Regulations  87 

and  wife  are  separated  and  living  permanently  apart  from 
each  other  each  shall  be  entitled  to  an  exemption  of  $3,000. 

If  Husband  and  Wife  Have  Separate  Estates  One  Return 
May  be  Made  Showing  Income  of  Each. 

If  the  husband  and  wife  not  living  apart  have  separate  es- 
tates, the  income  from  both  may  be  made  on  one  return,  but 
the  amount  of  income  of  each,  and  tbe  full  name  and  ad- 
dress of  both,  must  be  shown  in  such  return. 

The  husband,  as  the  head  and  legal  representative  of  the 
household  and  general  custodian  of  its  income,  should  make 
and  render  the  return  of  the  aggregate  income  of  himself  and 
wife,  and  for  the  purpose  of  levying  the  income  tax  it  is  as- 
sumed that  he  can  ascertain  the  total  amount  of  said  in- 
come. 

Wife's  Return  of  Separate  Estate  to  be  Attached  to  Hus- 
band's Return  or  Husband's  Income  May  be  Included  in 
Wife's  Return. 

If  a  wife  has  a  separate  estate  managed  by  herself  as  her 
own  separate  property  and  receives  an  income  of  $3,000  or 
over,  she  may  make  return  of  her  own  income,  and  if  the 
husband  has  other  net  income,  making  the  aggregate  of  both 
incomes  more  than  $4,000,  the  wife's  return  should  be 
attached  to  the  return  of  her  husband,  or  his  income  should 
be  included  in  her  return,  in  order  that  a  deduction  of  $i,000 
may  be  made  from  the  aggregate  of  both  incomes.  The  tax 
in  such  case,  however,  will  be  imposed  only  upon  so  much 
of  the  aggregate  income  of  both  as  shall  exceed  $4,000. 

Return  Required  if  Either  Husband  or  Wife  Has  an 
Income  of  $3,000  or  Over. 

If  either  husband  or  wife  separately  has  an  income  equal 
to  or  in  excess  of  $3,000,  a  return  of  annual  net  income  is 
required  under  the  law,  and  such  return  must  include  the 
income  of  both,  and  in  such  case  the  return  must  be  made 
even  though  the  combined  income  of  both  be  less  than  $4,000. 


88  Federal  Income  Tax 

Return  Required  if  Aggregate  Income  of  Husband  and  Wife 
is  in  Excess  of  $4,000,  Although  Neither  May  Have  an 
Income  of  $3,000  or  Over. 

If  the  aggregate  net  income  of  both  exceeds  $4,000,  an 
annual  return  of  their  combined  incomes  must  be  made  in 
the  manner  stated,  although  neither  one  separately  may  have 
an  income  of  $3,000  per  annum.  They  are  jointly  and  sep- 
arately liable  for  such  return  and  for  the  payment  of  the  tax. 

When  Status  is  to  be  Determined. 

The  single  or  married  status  of  the  person  claiming  the 
specific  exemption  shall  be  determined  as  of  the  time  of 
claiming  such  exemption  if  such  claim  be  made  within  the 
year  for  which  return  is  made,  otherwise  the  status  at  the 
close  of  the  year. 

Interest  in  Partnership  Profit;  How  Reported. 

Art.  11.  His  or  her  pro  rata  share  of  the  net  profits  de- 
rived from  a  partnership  business,  whether  or  not  divided 
and  paid  out,  shall  be  included  in  the  personal  return  of  each 
partner. 

Partnerships,  as  Such,  Not  Liable  to  Tax,  but  Statement 
May  be  Required. 

Art.  12.  Partnerships,  as  such,  are  not  subject  to  the 
income  tax,  and  are  only  required  to  make  return  when  re- 
quested to  do  so  by  the  Commissioner  of  Internal  Revenue 
or  the  collector  of  internal  revenue  for  the  district  in  which 
said  partnership  has  its  principal  place  of  business;  and 
when  a  return  is  required  it  shall  give  a  complete  and  cor- 
rect statement  of  the  gross  income  of  the  said  partnership 
and  also  a  complete  statement  of  the  actual  expenses  of 
conducting  the  business  of  said  partnership,  and  the  net 
profits  and  the  name  and  address  of  each  member  of  said  part- 
nership, and  their  respective  interest  in  the  net  profit  thus 
reported. 


Income  Tax  Regulations  89 

Partnership  Profits  to  be  Included  in  Returns  Made 
by  Individual  Partners. 

Art.  13.  The  net  annual  profits  of  a  partnership  when 
divided  and  paid  to  the  members  thereof  shall  be  included 
by  each  individual  partner  receiving  same  in  his  annual 
return  of  net  income,  and  the  tax  shall  be  paid  thereon  as 
required  by  law.  When  the  annual  profits  of  a  partnership 
are  not  distributed  and  paid  to  the  members  thereof  the 
respective  interest  of  each  member  in  said  profits  shall  be 
ascertained,  and  the  individuals  entitled  thereto  shall  in- 
clude the  said  amount  in  their  annual  return  as  a  part  of 
their  gross  income,  the  same  as  if  said  profits  had  been  dis- 
tributed and  paid  to  them. 

Individual  Partnership  Profits. 

Art.  14.  Undivided  annual  net  profits  of  partnerships 
thus  returned  by  the  individual  members  thereof,  and  tax 
paid  thereon,  shall  not,  when  said  profits  are  actually  dis- 
tributed and  paid  to  such  members,  be  again  included  in  their 
annual  return  as  a  part  of  their  gross  income. 

Partnerships,  as  Such,  May  File  Certificate  Claiming 
Deduction. 

Partnerships  owning  interest  coupons  or  registered  interest 
orders  may  claim  deduction  for  legitimate  expenses  incurred 
in  business  by  filing  the  proper  certificate  with  the  with- 
holding agent.     (See  T.  D.  1957.) 

RETURNS. 

When  Returns  of  Annual  Net  Income  of  $8,000  or  Over 
Are  to  be  Made. 

Art.  15.  Each  person  of  lawful  age  whose  net  income  is 
$3,000  or  over  shall,  on  or  before  the  1st  day  of  March, 
1914,  and  on  or  before  the  1st  day  of  March  each  year  there- 
after, file  an  accurate  return  of  income  under  oath  or  affirma- 
tion, except  as  herein  provided.     (See  Article  8.) 


90  Federal  Income  Tax 

Where  Filed. 

If  the  person  making  the  return  of  income  has  his  place 
of  business  in  the  collection  district  in  which  he  resides, 
the  return  shall  be  filed  with  the  collector  of  that  district. 
If  his  principal  place  of  business  is  elsewhere,  the  return 
shall  be  filed  in  the  district  in  which  that  business  is  lo- 
cated. 

In  the  case  of  an  individual  residing  in  a  foreign  country 
return  shall  be  made  to  the  collector  of  internal  revenue 
for  the  district  where  his  principal  business  is  carried  on 
within  the  United  States. 

Form  of  Return. 
Aet.    16.    The  required  return  will  be  made  on   Form 
1040  in  accordance  with  the  instructions  printed  thereon, 
and  will  specifically  set  forth — 

1.  All  income  received  from  each  specific  source  and  the 
total  thereof. 

2.  All  the  separate  items  of  deduction  claimed  under 
paragraph  B  of  this  law. 

3.  The  amount  of  specific  exemption  claimed  under  par- 
agraph C. 

4.  All  amounts  of  income  upon  which  tax  has  been  with- 
held at  source  by  withholding  agent  or  agents. 

When  Return  Will  be  Made  by  Guardian  or  Duly 
Authorized  Agent. 

Art.  17.  When  by  reason  of  minority,  insanity,  absence, 
sickness,  or  other  disability,  the  individual  is  unable  to 
make  his  own  return,  the  same  shall  be  made  by  his  guardian 
or  duly  authorized  agent. 

Executor  or  Administrator  to  Make  Return  in  Case  of  Death. 

In  the  case  of  the  death  of  a  person  whose  net  income 
for  the  part  of  the  year  during  which  he  lived  was  $3,000 
or  over,  return  of  net  income  shall  be  made  by  the  executor 
or  administrator  of  the  estate  of  the  deceased,  and  in  com- 
puting the  taxable  income  of  such  estate  there  shall  be  al- 
lowed the  specific  exemption  provided  by  law. 


Income  Tax  Regulations  91 

Notice  of  Failure  to  File  Return  to  be  Served  on 
Guardian  or  Agent. 
Art.  18.  When  the  required  return  has  not  been  made 
by  a  person  acting  as  guardian,  agent  of  a  nonresident  alien, 
or  by  one  acting  in  any  other  capacity  in  which  the  law 
makes  it  a  duty  for  him  to  represent  the  individual,  notice 
of  failure  to  make  such  return  will  be  served  upon  such 
guardian  or  agent. 

Evidence  May  be  Filed  Showing  Nonliability  to  Make 

Return. 

The  person  upon  whom  such  notice  is  served  may,  how- 
ever, when  the  facts  warrant,  file  evidence  with  the  col- 
lector showing  that  the  individual  for  whom  he  acts  did  not 
receive  an  income  subject  to  tax  during  the  year,  or  that 
the  said  guardian  or  agent  had  filed  the  return  with  some 
other  collector. 

Returns  Not  Required  of  Persons  for  Whom  Full  Returns 
Have  Been  Made  by  Others. 

Art.  19.  Any  individual  whose  net  income  is  less  than 
$20,000,  for  whom  full  return  has  been  made  by  others  as 
withholding  agents,  shall  not  be  required  to  make  a  return. 

Returns  to  be  Prepared  by  Collector  in  Certain  Cases. 

Art.  20.  If  any  person  liable  to  pay  an  income  tax  for 
himself  or  others  shall  fail  to  make  and  deliver  the  return  re- 
quired by  law,  but  shall  consent  to  disclose  the  particulars  of 
any  business  or  occupation  liable  to  pay  such  tax,  it  shall 
be  the  duty  of  the  collector  or  deputy  collector  to  make  such 
list  or  return,  which  being  distinctly  read  and  consented  to, 
signed,  and  verified  by  oath  or  affirmation  by  the  person  liable 
to  make  such  return,  the  same  may  be  received  as  the  list  or 
return  of  such  person. 

Refusal  or  Neglect  to  Make  Return. 

Art.  21.  In  case  any  person  liable  to  make  return  shall 
neglect  or  refuse  to  make  or  render  a  list  or  return,  or  shall 


92  Federal  Income  Tax 

render  a  willfully  false  or  fraudulent  return,  it  shall  be  the 
duty  of  the  collector,  after  due  notice  has  been  given,  to  make 
such  list,  according  to  the  best  information  he  can  obtain  by 
the  examination  of  such  person,  or  any  other  evidence.1 

Penalty  for  Failure  to  Make  Return  or  for  Making  False 

Return. 

When  duly  certified  by  the  collector,  the  said  list  thus  pre- 
pared shall  be  the  return  of  said  person,  and  the  tax  so  ascer- 
tained to  be  due,  together  with  the  50  per  cent  or  100  per 
cent  penalty  incurred,  shall  be  assessed  and  collected. 

Returns  to  be  Verified  by  Oath  or  Affirmation. 

Art.  22.  The  annual  return  must  be  verified  by  oath  or 
affirmation  of  the  person  making  the  same.  Collectors  are 
directed  by  law  to  require  every  return  to  be  so  verified  by  the 
person  rendering  it.  The  affidavit  may  be  made  before  the 
collector  for  the  district  or  before  any  officer  authorized  by 
law  to  administer  oaths. 

Extension  of  Time  to  File  Return  May  be   Granted. 

Art.  23.  When  the  return  is  not  filed  within  the  required 
time  by  reason  of  sickness  or  absence  of  the  individual,  an 
extension  of  time,  not  exceeding  30  days  from  March  1, 
within  which  to  file  such  return  may  be  granted  by  the  col- 
lector, provided  a  written  application  therefor  is  made  by  the 
individual  within  the  period  for  which  such  extension  is  de- 
sired. 

Returns  to  be  Forwarded  to  Commissioner  of  Internal 
Revenue   by  Registered  Mail. 

Art.  24.  The  annual  returns  will  be  forwarded  by  col- 
lectors by  registered  mail  to  the  Commissioner  of  Internal 
Revenue  with  the  list  for  the  month  in  which  the  returns 
are  filed.     Collectors  must  provide  that  said  returns  and  all 

lFor  method  of   procedure  in  such  cases,  see  sees.  3173  and  3176,  Rev.  Stat.,  and  also 
Form  1045,  the  form  of  notice  to  be  given  in  such  cases. 


Income  Tax  Regulations  93 

forms  relating  thereto  are  securely  sealed  in  envelopes  or 
packages  before  forwarding  the  same. 

Assessments;  Notification  of;  When  to  be  Paid. 

Art.  25.  All  assessments  shall  be  made  by  the  Commis- 
sioner of  Internal  Eevenue,  and  all  persons  shall  be  notified 
of  the  amount  for  which  they  are  respectively  liable  on  or 
before  the  1st  day  of  June  of  each  successive  year,  and 
said  assessments  shall  be  paid  on  or  before  the  30th  day  of 
June,  except  in  cases  of  refusal  or  neglect  to  make  such  re- 
turn and  in  cases  of  false  or  fraudulent  returns,  in  which 
cases  the  Commissioner  of  Internal  Revenue  shall,  upon  the 
discovery  thereof,  at  any  time  within  three  years  after  said 
return  is  due,  make  a  return  upon  information  obtained,  as 
provided  by  the  law,  and  the  assessment  made  by  the  Com- 
missioner of  Internal  Revenue  thereon  shall  be  paid  by 
such  person  or  persons  immediately  upon  notification  of  the 
amount  of  such  assessment. 

Penalty  for  Failure  to  Pay  Tax. 

To  any  sum  or  sums  due  and  unpaid  after  the  30th  day 
of  June  in  any  year,  and  for  10  days  after  notice  and  de- 
mand thereof  by  the  collector,  there  shall  be  added  the  sum 
of  5  per  cent  on  the  amount  of  tax  unpaid,  and  interest  at  the 
rate  of  1  per  cent  per  month  upon  said  tax  from  the  time  the 
same  became  due,  except  from  the  estates  of  insane,  de- 
ceased, or  insolvent  persons. 

Penalties  for  Failure  to  Make  Returns. 

Art.  26.  If  any  person,  corporation,  joint-stock  company, 
association,  or  insurance  company  liable  to  make  returns  ot 
pay  tax  shall  refuse  or  neglect  to  make  returns  at  the  time 
or  times  specified  in  each  year,  such  person  shall  be  liable 
to  a  penalty  of  not  less  than  $20  nor  more  than  $1,000. 

Penalties  for  Making  False  or  Fraudulent  Returns. 

Any  person  or  any  officer  of  any  corporation  required  by 
law  to  make,  render,  sign,  or  verify  any  return  who  makes 


94  Federal  Income  Tax 

any  false  or  fraudulent  return  or  statement  with  intent  to 
defeat  or  evade  the  assessment  required  by  law  to  he  made 
shall  be  guilty  of  a  misdemeanor,  and  shall  be  fined  not  ex- 
ceeding $2,000  or  be  imprisoned  not  exceeding  one  year,  or 
both,  at  the  discretion  of  the  court,  with  the  costs  of  prose- 
cution. 

Art.  27.  Nothing  in  the  law  or  these  regulations  shall  be 
construed  to  release  a  taxable  person  from  liability  for  in- 
come tax,  nor  shall  any  contract  entered  into  after  the  act  of 
October  3,  1913,  took  effect  be  valid  in  regard  to  any  Fed- 
eral income  tax  imposed  upon  a  person  liable  to  such  pay- 
ment. 

Art.  28.  For  regulations  relative  to  the  claiming  of  ex- 
emptions and  deductions  on  income,  the  tax  on  which  is  to 
be  deducted  and  withheld  at  the  source,  see  Article  33. 


PART  2 

Collections  at  the  Souece. 

Collections  at  Source  Applies  Only  to  the  Normal  Tax  Im- 
posed Upon  Individuals.  Collection  at  Source  Not  Oper- 
ative Until  November  1,  WIS. 

Aet.  29.  The  deductions  and  payment  of  the  tax  at  the 
source  of  income  applies  only  to  the  normal  tax  imposed  upon 
individuals  and  shall  not  be  construed  to  require  any  of 
such  tax  to  be  withheld  prior  to  the  1st  day  of  November, 
1913. 

Persons,  Firms,  etc.,  Required  to  Withhold  Tax  at  the 

Source. 

Aet.  30.  Paragraph  E  of  section  2  of  the  act  provides 
that- 
All  persons,  firms,  copartnerships,  companies,  corporations,  joint- 
stock  companies  or  associations,  and  insurance  companies,  in  what- 
ever capacity  acting,  including  lessees  or  mortgagors  of  real  or  per- 
sonal property,  trustees  acting  in  any  trust  capacity,  executors,  ad- 
ministrators, agents,  receivers,  conservators,  employers,  and  all 
officers  and  employees  of  the  United  States  having  the  control,  re- 
ceipt, custody,  disposal,  or  payment  of  interest,  rent,  salaries,  wages, 
premiums,  annuities,  compensation,  remuneration,  emoluments,  or 
other  fixed  or  determinable  annual  gains,  profits,  and  income  of 
another  person,  exceeding  $3,000  for  any  taxable  year,  other  than 
dividends  on  capital  stock,  or  from  the  net  earnings  of  corporations 
and  joint-stock  companies  or  associations  subject  to  like  tax,  who 
are  required  to  make  and  render  a  return  in  behalf  of  another,  as 
provided  herein,  to  the  collector  of  his,  her,  or  its  district,  are 
hereby  authorized  and  required  to  deduct  and  withhold  from  such 
annual  gains,  profits,  and  income  such  sum  as  will  be  sufficient  to 
pay  the  normal  tax  imposed  thereon  by  this  section,  and  shall  pay 
to  the  officer  of  the  United  States  Government  authorized  to  receive 
the  same;  and  they  are  each  hereby  made  personally  liable  for  such 
tax. 

Withholding  Agents. 

Aet.  31.  All  persons,  firms,  etc.,  mentioned  in  the  above- 
quoted   paragraph  are  referred  to  in  these   regulations   as 


96  Federal  Income  Tax 

"debtors"  or  "withholding  agents,"  and  the  word  "source" 
is  to  apply  to  the  place  where  the  income  originated  and  is 
payable. 

Income  as  to  Which  Tax  is  to  be  Withheld. 

Art.  32.  The  income  from  which  the  normal  tax  of  1  per 
cent  is  to  be  withheld  by  withholding  agents  includes  all 
items  of  income  exceeding  in  the  aggregate  $3,000  and  pay- 
able to  any  one  person  during  the  year,  except: 

(a)  Dividends  on  capital  stock  or  from  the  net  earnings 
of  corporations  and  joint-stock  companies  or  associations  and 
insurance  companies  subject  to  like  tax. 

(b)  Income  of  an  individual  which  is  not  fixed  or  cer- 
tain and  not  payable  at  stated  periods,  or  is  indefinite  or 
irregular  as  to  amount  or  time  of  accrual,  shall  not  be  with- 
held at  the  source,  but  shall  be  listed  in  the  annual  return 
of  the  individual,  and  the  tax  shall  be  paid  thereon  by  him. 

Incomes  derived  from  the  following  professions  and  vo- 
cations come  under  this  head:  Agents  compensated  on  the 
commission  basis,  lawyers,  doctors,  authors,  inventors,  and 
other  professional  persons  whose  income  is  irregular  and 
indefinite. 

Special  Fees  and  Annual  Retainers. 

Such  persons  shall  make  personal  return  of  all  their  in- 
come, provided  their  total  net  income  from  all  sources  is 
$3,000  or  over.  For  example :  When  a  lawyer  receives  a  re- 
tainer of  $5,000  as  a  special  fee,  a  deduction  therefrom 
shall  not  be  made  by  the  payer;  but  when  a  lawyer  receives 
a  retainer  of  $5,000  per  annum,  and  the  exemption  claimed 
is  $3,000,  $2,000  of  such  income  would  be  taxed  and  the 
tax  retained  at  the  source ;  or  if  his  exemption  claimed  should 
be  $4,000,  $1,000  of  such  income  would  be  taxed  and  the 
tax  thereon  withheld  at  the  source. 

(c)  Items  listed  in  article  5,  which  are  wholly  exempt 
from  tax. 


Income  Tax  Eegdlations  97 

Exemptions   Under  Paragraph  C.     Certificate  to  be  Filed 
with   Withholding  Agent. 

Art.  33.  (a)  In  all  cases  where  the  income  tax  of  a  per- 
son is  withheld  and  deducted  and  paid  or  to  be  paid  at  the 
source,  such  person  shall  not  receive  the  benefit  of  the  de- 
duction and  exemption  allowed  in  paragraph  C  (see  Arts.  9 
and  10)  except  by  an  application  to  the  collector  for  refund 
of  the  tax  unless  he  shall,  not  less  than  SO  days  prior  to  the 
day  on  which  the  return  of  his  income  is  due,  file  with  the 
person  who  is  required  to  withhold  and  pay  tax  for  him  a 
certificate  claiming  the  benefit  of  such  exemption,  and  there- 
upon no  tax  shall  be  withheld  upon  the  amount  of  such  ex- 
emption. 

Penalty  for  Making  False  Representations  to   Obtain 
Exemption. 

If  any  person  for  the  purpose  of  obtaining  any  allowance 
or  reduction  by  virtue  of  a  claim  for  such  exemption,  either 
for  himself  or  for  any  other  person,  knowingly  makes  any 
false  statement  or  false  or  fraudulent  representation,  he  shall 
be  liable  to  a  penalty  of  $300. 

Deductions  Under  Paragraph  B.     Form  1008  to  be  Filed 
with  Withholding  Agent  or  Collector. 

(6)  Nor  shall  any  person  under  the  foregoing  conditions 
be  allowed  the  benefit  of  any  deduction  provided  for  in  sub- 
section B  (see  Art.  6,  1  to  6)  unless  he  shall,  not  less  than 
30  days  prior  to  the  day  on  which  the  return  of  his  income 
is  due,  either  file  with  the  person  who  is  required  to  with- 
hold and  pay  tax  for  him  a  true  and  correct  return  (on  Form 
1008)  of  his  annual  gains,  profits,  and  income  from  all  other 
sources,  and  also  the  deductions  asked  for,  and  the  showing 
thus  made  shall  then  become  a  part  of  the  return  to  be  made 
in  his  behalf  by  the  person  required  to  withhold  and  pay  the 
tax,  and  the  debtor  or  withholding  agent  will  only  withhold 
the  tax  on  the  payments  made  in  excess  of  the  deductions 
claimed  on  said  form.  Or  such  person  may  likewise  make 
7 


98  Federal  Income  Tax 

application  for  deductions  to  the  collector  of  the  district 
in  which  the  return  is  made  or  to  be  made  for  him,  (See 
T.  D.,  1965.) 

Certificate  Filed  on  Behalf  of  Minors  or  Insane  Persons. 

If  such  person  is  a  minor  or  an  insane  person,  or  is  absent 
from  the  United  States,  or  is  unable  owing  to  serious  illness 
to  make  the  return  and  application  above  provided  for,  the 
return  and  application  may  be  made  for  him  or  her  by  the 
person  required  to  withhold  and  pay  the  tax,  he  making  oath 
on  certificate  (Form  1009)  under  the  penalties  of  this  act 
that  he  has  sufficient  knowledge  of  the  affairs  and  property  of 
his  beneficiary  to  enable  him  to  make  a  full  and  complete 
return  for  him  or  her,  and  that  the  return  and  application 
made  by  him  are  full  and  complete. 

Claims  for  Refund. 
(c)  When,  however,  claims  for  exemption  and  deductions 
as  above  described  are  not  filed  within  the  prescribed  time, 
the  tax  collected  in  excess  can  be  remitted  only  on  presenta- 
tion of  a  claim  for  refund  under  the  provisions  of  section 
3220,  Revised  Statutes,  said  claims  to  be  made  either  by  the 
withholding  agent  against  whom  the  assessment  was  made  or 
by  the  person  on  account  of  whom  such  taxes  were  withheld. 

Claims  for  Abatement. 
Claims  for  abatement  of  taxes  erroneously  assessed,  or 
which  are  excessive  in  amount,  may,  prior  to  collection 
thereof,  be  filed  under  the  provisions  of  said  section  3220, 
Revised  Statutes,  either  by  the  withholding  agent  against 
whom  the  assessment  was  made  or  by  the  persons  on  account 
of  whom  such  taxes  were  withheld. 

Taxes  Withheld  Not  to  be  Forwarded  to  Collector  Until 
Notices  of  Assessment  Have  Been  Received. 

In  the  monthly  list  returns  as  now  prescribed  a  space  is 
provided  to  show  the  amount  of  taxes  which  the  withhold- 
ing agent  may  remit  to  the  collector  when  such  returns  are 
filed.     The  withholding  agent  will  not,  however,   forward 


Income  Tax  Regulations  99 

to  the  collector  amounts  withheld  by  him  until  notices  of  as- 
sessment are  received  from  the  collector. 

Claims  for  exemption  and  deductions  may  be  filed  with 
the  withholding  agent  and  claims  for  deductions  may  be 
filed  with  the  collector  not  later  than  SO  days  prior  to 
March  1. 

Withholding  Agents  to  be  Furnished  Statement  of  Deduc- 
tions Claimed  Through  Collector. 

In  cases  where  claims  for  deductions  are  filed  with  the  col- 
lector within  the  time  prescribed  the  collector  will  imme- 
diately furnish  the  withholding  agent  (whose  name  and  ad- 
dress must  be  shown  on  Form  1008)  with  a  statement  of 
the  amount  of  deductions  claimed,  and  said  withholding 
agent  shall  not  withhold  and  pay  the  normal  tax  to  the  ex- 
tent of  the  deductions  claimed  as  per  said  list. 

Withholding  agents  should  not  file  their  annual  returns 
until  after  the  expiration  of  the  time  allowed  persons  to  file 
claims  for  exemptions  and  deductions,  and  if  claims  for  de- 
ductions are  filed  with  the  collector  in  the  required  time, 
yet  not  in  sufficient  time  to  have  the  adjustment  made  by 
the  withholding  agent,  the  collector  will  make  the  adjust- 
ment on  the  withholding  agent's  return  and  in  reporting 
such  withholding  agent  for  assessment  will  make  allowance 
for  the  amount  of  such  deductions  claimed.  Notice  of  such 
adjustment,  however,  must  be  furnished  the  withholding 
agent. 

Tax  Withheld  to  be  Paid  to  Collector  of  District. 

Art.  34.  The  normal  tax  of  1  per  cent  shall  be  deducted 
and  withheld  at  the  source,  and  payment  made  to  the  col- 
lector of  internal  revenue  as  provided  in  the  law,  by  the 
debtor,  or  his,  her,  or  its  duly  appointed  agent  authorized  to 
make  such  deduction  and  payment. 

Tax  Withheld  by  One  Agent  Not  to  be  Again  Withheld  by 
Another  Agent. 
No  other  person,  firm,  or  organization,  in  whatever  ca- 
pacity acting,  having  the  receipt,  custody,  or  disposal  of  any 


100  Federal  Income  Tax 

income,  as  herein  provided,  shall  be  required  to  again  deduct 
and  withhold  the  normal  tax  of  1  per  cent  thereon,  pro- 
vided that  any  such  person,  firm,  or  organization  other  than 
the  debtor  who  has  withheld  said  tax  shall  file  with  the 
collector  of  internal  revenue  for  his,  her,  or  its  district 
a  certificate  (Form  1006)  showing  from  whom  and  in  what 
amount  the  tax  has  been  so  withheld. 

Returns  to  be  Made  to  Collector  of  Internal  Revenue. 

Art.  35.  Withholding  agents  who  are  required  to  make 
monthly  returns  will,  on  or  before  the  20th  day  of  each 
month,  file  with  the  collector  for  their  respective  districts 
such  returns  for  the  preceding  month,  accompanied  by  all 
certificates  relating  thereto,  and  there  shall  also  accompany 
said  returns  all  certificates  claiming  exemptions  and  deduc- 
tions which  are  not  required  to  be  listed  thereon ;  and  on  or 
before  the  1st  day  of  March  in  each  year  said  withholding 
agents  shall  likewise  file  their  annual  returns  for  the  pre- 
ceding calendar  year.  Annual  returns  (Forms  1041  and 
1042)  must  be  accompanied  by  all  certificates  claiming  ex- 
emptions and  deductions  relating  thereto. 

Art.  36.  For  regulations  as  to  assessment  and  collection 
of  taxes  from  withholding  agents,  see  article  25  and  "As- 
sessments and  collections,"  Part  4. 


Income  Derived  from  Interest  Upon  Bonds  and  Mort- 
gages or  Deeds  of  Trust  or  Other  Similar  Obliga- 
tions of  Corporations,  etc. 

Tax  on  Income  Derived  from  Interest  on  Bonds,  etc.,  to  be 

Deducted. 
Art.  37.  Under  the  law  a  tax  of  1  per  cent,  designated 
as  the  normal  tax,  shall  be  deducted  at  "the  source,"  begin- 
ning November  1,  1913,  from  all  income  accruing  and  pay- 
able to  any  person  subject  to  such  tax  which  may  be  derived 
from  interest  upon  bonds  and  mortgages,  or  deeds  of  trust,  or 
other  similar  obligations,  including  equipment  trust  agree- 


Income  Tax  Regulations  101 

ments  and  receivers'  certificates  of  corporations,  joint-stock 
companies  or  associations,  and  insurance  companies,  although 
such  interest  does  not  amount  to  $3,000. 

Interest  on  State  and  Government  Obligations  Exempt. 

Income  derived  from  the  interest  upon  the  obligations  of 
a  State,  county,  city,  or  any  other  political  subdivision  there- 
of, and  upon  the  obligations  of  the  United  States  or  its  pos- 
sessions, is  not  subject  to  the  income  tax,  and  certificates  of 
ownership  in  connection  with  coupons  or  registered  interest 
orders  for  such  interest  will  not  be  required. 

Term  "Debtor"  to  Apply  to  all  Corporations,  etc.,  and  to 
Duly  Appointed  Withholding  and  Paying  Agents. 

Art.  38.  The  term  "debtor,"  as  hereinafter  used,  shall 
apply  to  all  corporations,  joint-stock  companies  or  associa- 
tions, and  insurance  companies ;  and  such  "debtor"  may  ap- 
point withholding  and  paying  agents  to  act  for  it  in  matters 
pertaining  to  the  collection  of  this  tax,  upon  filing  with  the 
collector  of  internal  revenue  for  the  district  a  proper  notice 
of  the  appointment  of  such  agent  or  agents.  Where  such 
withholding  agent  is  so  authorized  by  the  debtor  corporation, 
he  may  file  with  the  collector  of  his  district  the  required  re- 
turns and  accompanying  certificates  (Arts.  50  and  51),  in 
which  case  the  assessment  of  the  tax  withheld  by  him  will  be 
made  in  that  district.  Unless  such  authority  is  given,  such 
reports,  etc.,  will  be  furnished  by  the  debtor  corporation  to 
the  collector  of  its  district  (i.  e.,  the  district  in  which  its 
principal  financial  or  business  office  is  located),  where,  in 
such  case,  assessment  will  be  made. 

Tax  to  be  Deducted  and  Withheld  by  Debtor  Corporation. 

Aet.  39.  For  the  purpose  of  collecting  the  tax  on  all  cou- 
pons and  registered  interest  originating  or  payable  in  the 
United  States,  the  source  shall  be  the  debtor  (or  its  with- 


102  Federal  Income  Tax 

holding  and  paying  agent  in  the  United  States),  who  shall 
deduct  the  tax  when  same  is  to  be  withheld,  and  no  other 
bank,  trust  company,  banking  firm,  or  individual  taking 
coupons  or  interest  orders  for  collection,  or  otherwise,  shall 
withhold  the  tax  thereon,  where  such  coupons  or  orders  for 
registered  interest  are  accompanied  by  certificates  of  owner- 
ship signed  by  the  owners  of  the  bonds  upon  which  the  in- 
terest matured.  These  certificates  shall  be  made  on  the 
prescribed  forms  and  shall  be  made  out  by  each  owner  of 
bonds  for  the  coupons  or  interest  orders  for  each  separate 
issue  of  bonds  or  obligations  of  each  debtor.  (See  Arts.  43 
and  46  and  70.) 

Substitute  Certificates,  When  Permitted.     Record  to  be  Kept 
by  Collecting  Agent. 

Art.  40.  Responsible  banks,  bankers,  and  collecting 
agents  receiving  coupons  for  collection  with  the  aforesaid 
certificates  of  ownership  attached  may  present  the  coupons 
with  the  attached  certificates  to  the  debtor  or  withholding 
agent  for  collection,  or  such  certificates  may  be  attached  and 
forwarded  direct  to  the  Commissioner  of  Internal  Revenue, 
provided  such  bank,  banker,  or  collecting  agent  shall  substi- 
tute for  such  certificates  its  own  certificate,  and  shall  keep 
a  complete  record  of  each  transaction,  showing — 

1.  Serial  number  of  item  received. 

2.  Date  received. 

3.  Name  and  address  of  person  from  whom  received. 

4.  Name  of  debtor  corporation. 

5.  Class  of  bonds  from  which  coupons  were  cut. 

6.  Face  amount  of  coupons. 

7.  Exemptions  from  tax  claimed  by  owner  under  para- 
graph C. 

For  the  purpose  of  identification,  such  substitute  certifi- 
cates should  be  numbered  consecutively,  and  corresponding 
numbers  given  the  original  certificates  of  ownership. 


Income  Tax  Regulations  103 

Privilege  of  Substituting  Certificates  Extended  to  Foreign 

Countries. 

The  permission  here  granted  will  extend  to  responsible 
banks,  bankers,  and  collecting  agents  in  foreign  countries, 
through  whom  collection  of  such  interest  coupons  is  made. 

The  various  substitute  certificates  hereby  authorized  will 
correspond  with  the  form  numbers  of  the  ownership  certifi- 
cates detached  by  the  collecting  agent,  except  that  the  sub- 
stitute certificates'  form  numbers  will  be  followed  by  the  let- 
ter "a."     (See  T.  D.  1974,  amending  Arts.  41-46.) 

Normal  Tax  to  be  Deducted  Before  Payment  of  Interest. 
(See  T.  D.  197b.) 

Art.  41.  A  debtor  whose  bonds  may  be  registered,  both 
as  to  principal  and  interest,  shall  deduct  the  normal  tax  of 
1  per  cent  from  the  accruing  interest  on  all  bonds  before 
sending  out  checks  for  said  interest  to  registered  owners  or 
before  paying  such  interest  upon  interest  orders  signed  by 
the  registered  holders  of  said  bonds  unless  there  shall  be 
filed  with  said  debtor  or  its  fiscal  agent  (not  later  than  30 
days  prior  to  March  1),  through  whom  said  interest  is  cus- 
tomarily paid,  the  proper  certificates  claiming  exemption 
from  liability  for  said  tax  as  herein  provided,  executed— 

Claims  for  Exemption  from  Tax;  by  Whom  Same  May 
be  Filed. 

By  a  citizen  or  resident  of  the  United  States,  the  bona  fide 
owner  of  the  registered  obligations,  who  may  claim  exemp- 
tion under  paragraph  C,  section  2,  of  the  income  tax  law,  or 

By  corporations,  joint-stock  companies,  associations,  or 
insurance  companies  organized  in  the  United  States,  or  or- 
ganizations, associations,  fraternities,  etc.,  which  are  either 
taxable  or  exempt  from  taxation,  as  provided  in  paragraph 
G,  subdivision  (a),  of  the  act,  or 

By  a  bona  fide  resident  and  citizen  of  a  foreign  country, 
claiming  exemption  as  such. 


104  Federal  Income  Tax 

Certificates  of  Ownership  to  Specify  Bonds  and  Amount  of 
Interest  Due. 

Art.  42.  If  the  owners  of  the  bonds  are  individuals  who 
are  citizens  or  residents  of  the  United  States,  the  aforesaid 
certificates  shall  accompany  the  coupons,  or,  with  respect  to 
the  interest  on  registered  bonds,  shall  be  filed  with  payer  of 
said  interest,  and  such  certificates  shall  describe  the  bonds 
and  show  the  amount  of  coupons  attached  or  the  amount  of 
interest  due  such  owners  on  registered  bonds  and  the  name 
and  address  of  the  owners,  and  if  registered  in  names  other 
than  the  owners  such  names  with  addresses  shall  also  be 
given. 

Claim  for  Exemption   Under  Paragraph  C. 

Such  certificates  shall  also  show  whether  the  claimants  do 
or  do  not  then  claim  exemption  from  taxation  at  the  source, 
under  paragraph  C,  Articles  9  and  10  ($3,000,  and  under 
certain  conditions  $4,000),  as  to  the  income  represented  by 
such  coupons  or  interest.  The  certificates  will  be  prepared 
on  Form  1000  and  must  show  the  amount,  if  any,  of  ex- 
emption claimed,  the  total  amount  of  exemption  to  which  the 
claimant  is  entitled,  and  must  be  signed  by  the  claimants, 
who  shall  use  their  ordinary  business  signatures.  The  cer- 
tificates shall  also  show  the  postoffice  and  street  address  of 
the  claimants,  the  internal  revenue  district,  and  the  date 
when  signed. 

Certificates  May  be  Signed  by  Duly  Authorized  Agents,  etc. 
Certificates  to  be  Verified  by  Withholding  Agents. 

Art.  43.  Duly  authorized  agents  may  sign  such  certifi- 
cates for  the  persons  for  whom  they  act,  and  withholding 
agents,  banks,  or  others,  with  whom  such  certificates  are  filed, 
if  satisfied  as  to  the  identity  and  responsibility  of  the  per- 
sons so  signing,  shall  stamp  or  write  on  the  face  of  each  such 
certificate,  "Satisfied  as  to  identity  and  responsibility  of 
agent,"  giving  name  and  address  of  person  thus  certifying. 
Certificates  so  verified  may  be  accepted  by  all  other  persons, 
firms,  or  organizations  to  whom  presented,  without  question 


Income  Tax  Regulations  105 

as  to  authority  of  such  agent  If  the  person,  firm,  or  organi- 
zation first  receiving  such  certificate  is  not  satisfied  as  to  the 
agent's  identity  and  responsibility,  then,  in  that  event,  the 
agent  shall  furnish  evidence  of  his  authority  to  so  act,  which 
will  be  retained  by  the  person,  firm,  or  organization  re- 
ceiving it,  and  the  certificate  of  ownership  shall  be  indorsed 
as  above  provided. 

Tax  to  be  Deducted  Before  Payment  of  Interest. 

Art.  44.  Whenever  interest  coupons,  accompanied  by  a 
certificate  of  an  individual  who  is  a  citizen  or  resident  of 
the  United  States,  are  presented  to  a  debtor  or  its  withhold- 
ing agent  for  payment,  or  whenever  interest  is  payable  to 
such  individual  on  a  bond  registered  as  to  both  principal  and 
interest,  the  debtor  or  its  withholding  agent  shall  deduct 
and  withhold  the  amount  of  the  normal  tax,  except  to  the  ex- 
tent that  exemption  is  claimed  in  the  certificate  of  owner- 
ship (Form  1000). 

Where  the  interest  to  be  paid  is  registered,  the  same  form 
of  certificate  shall  be  used  where  exemptions  are  claimed, 
and  it  shall  be  filed  with  the  debtor  at  least  five  clays  before 
the  due  date  of  such  interest. 

Tax  on  Interest  Payable  to  Certain  Corporations,  etc.,  Not 
to  be  Deducted. 

Art.  45.  If  the  owners  of  the  bonds  are  corporations, 
joint-stock  companies,  associations,  or  insurance  companies 
organized  in  the  United  States,  no  matter  how  created  or  or- 
ganized, or  organizations,  associations,  fraternities,  etc., 
which  are  either  taxable  or  exempt  from  taxation  as  pro- 
vided in  paragraph  G,  subdivision  (a)  of  the  act,  the  debtor 
is  not  required  to  withhold  or  deduct  the  tax  upon  income 
derived  from  interest  on  such  bonds,  provided  coupons  or 
orders  for  interest  from  such  bonds  shall  be  accompanied  by 
a  certificate  of  the  owners  thereof  certifying  to  such  own- 
ership, which  certificates  shall  be  filed  with  the  debtor  when 
such  coupons  or  interest  orders  are  presented  for  payment. 


106  Federal  Income  Tax 

Certificates  of  Corporations  Claiming  Exemption. 
Such  certificate  will  be  made  on  Form  1001,  and  must  be 
signed  in  the  name  of  the  organization  (stating  its  place  of 
business)  by  the  president,  secretary,  or  some  other  principal 
officer  of  the  said  corporation  or  organization  duly  author- 
ized to  sign  same,  and  must  be  properly  dated. 

Certificates  of  Nonresident  Aliens. 

Art.  46.  Coupons,  or  orders  for  registered  interest,  pay- 
able in  the  United  States,  representing  the  interest  on  bonds 
owned  by  nonresident  aliens,  must  be  accompanied  by  the  pre- 
scribed certificate  (Form  1004),  but  this  certificate  may  be 
signed  either  by  the  owner  or,  in  behalf  of  the  owner,  by  a 
reputable  bank  or  bankers  or  other  responsible  collecting 
agency,  certifying  to  the  ownership  of  the  bonds  and  giving 
the  name  and  address  of  the  bona  fide  nonresident  and  alien 
owners,  and  when  such  certificate  is  thus  attached  the  normal 
tax  of  1  per  cent  on  such  coupons  or  interest  orders  need 
not  be  withheld  at  the  source  by  the  debtor  or  collecting 
agency.  Unless  such  proof  of  foreign  ownership  is  fur- 
nished, the  normal  tax  of  1  per  cent  should  be  deducted. 

Foreign  organizations  engaged  in  business  within  the 
United  States  are  subject  to  the  normal  tax  of  1  per  cent  per 
annum  upon  the  amount  of  net  income  accruing  from  busi- 
ness transacted  and  capital  invested  within  the  United  States ; 
but  said  organizations  shall  be  exempt  from  having  any 
part  of  their  income  withheld  by  a  debtor  or  withholding 
agent,  and  claim  for  such  exemption  will  be  made  on  Form 
1018. 

Certificates  Filed  by  Partnership,  Showing  Interest  of 
Individual  in  Partnership  Profits,  etc. 

Art.  47.  Inasmuch  as  individual  members  of  a  partner- 
ship are  liable  for  income  tax  upon  their  respective  interest 
in  the  net  earnings  of  such  partnership,  the  partnership  may 
file  with  the  withholding  agent  a  notice  signed  in  the  name 
of  the  partnership,  by  a  member  thereof,  claiming  a  deduc- 
tion of  a  specific  amount  on  account  of  the  legitimate  ex- 


Income  Tax  Regulations  107 

pense  incurred  in  conducting  the  business  of  said  partner- 
ship ;  and  upon  receipt  of  said  notice  said  withholding  agent 
shall  not  withhold,  and  shall  not  be  held  liable  for,  the  nor- 
mal tax  on  the  amount  of  income  equal  to  the  amount  of  de- 
duction claimed  in  said  notice ;  but  in  no  event  shall  the 
total  of  the  amounts  claimed,  as  provided  herein,  be  in  ex- 
cess of  the  total  amount  of  the  actual  legitimate  annual  ex- 
penses incurred  by  said  partnership  in  the  conduct  of  its 
business.  Application  for  such  deduction  shall  be  made  on 
Form  1011.     (This  article  47  repealed  by  T.  D.  1957.) 

Foreign  Partnerships,  Certificate  of  Ownership  May  be 
Filed  by. 

Art.  48.  Foreign  partnerships  or  firms,  all  the  members 
of  which  are  both  citizens,  or  subjects,  and  residents  of  a 
foreign  country,  which  are  the  owners  of  bonds  and  mort- 
gages or  deeds  of  trust  or  other  similar  obligations,  including 
equipment  trust  agreements,  receivers'  certificates,  and  stocks 
of  corporations,  joint-stock  companies  or  associations  and 
insurance  companies,  organized  or  doing  business  in  the 
United  States,  may  file  with  the  debtor  or  withholding  agent, 
with  their  coupons  or  orders  for  registered  interest,  or  orders 
for  other  income  derived  from  property  or  investments  in 
the  United  States,  a  certificate  and  notice  of  ownership 
(Form  1016)  setting  forth  the  above  facts;  and  the  debtor  or 
withholding  agent  shall  not  withhold  any  part  of  said  in- 
come. 

Foreign  Partnership,  Composed  of  Nonresident  Foreigners 
and  Citizens  of  United  States. 
Art.  49.  Where  a  foreign  partnership  or  firm  is  composed 
of  both  nonresident  foreigners  and  citizens  of  the  United 
States,  or  foreigners  residing  in  the  United  States  or  its 
possessions,  the  certificate  of  ownership  shall  show  this  fact, 
and  the  name  and  legal  address  of  each  member  of  said 
partnership  who  is  a  citizen  of  the  United  States,  or  who  is 
a  foreigner  residing  in  the  United  States  or  its  possessions, 
shall  be  given  on  the  back  of  said  certificate,  and  no  part  of 


108  Federal  Income  Tax 

said   income  shall  be  withheld.      The   said  certificate  and 

notice  of  ownership  in  either  case  above  provided  shall  be 

on  Form  1014. 

Monthly  List  Return. 

Art.  50.  Withholding  agents  are  required  to  file  in  dupli- 
cate a  monthly  list  return  (Form  1012)  giving  a  list  of  all 
coupon  or  interest  payments  made  on  which  the  normal  tax 
of  1  per  cent  was  deducted  and  withheld  from  interest  pay- 
ments made  upon  bonds  or  other  similar  obligations,  and 
shall  show  the  name  and  address  in  full  of  the  owners  of  the 
bonds,  amount  of  the  income,  amount  of  exemption  claimed, 
amount  of  income  on  which  withholding  agent  is  liable  for 
tax,  and  the  amount  of  tax  withheld. 

Forms  1012a,  1012b,  and  1012c  are  to  be  used  where 
Form  1012  does  not  afford  sufficient  space  in  which  to  enter 
all  items. 

Summary   of  Monthly   Lists   May   be    Used. 

Form  101 2d,  when  necessary  to  be  used,  shall  be  made  in 
duplicate  and  shall  be  a  summary  of  the  monthly  list  re- 
turn, Form  1012,  as  made  in  detail  by  the  withholding 
agent,  and  the  said  summary  and  lists  thereto  attached  when 
properly  filled  in  and  the  summary  signed  and  sworn  to  shall 
constitute  the  complete  monthly  list  return  of  the  withhold- 
ing agent  making  same  as  fully  as  if  each  list  attached  to 
the  summary  was  signed  and  sworn  to  separately. 

An  annual  list  return  (Form  1013)  in  duplicate  is  also 
required  to  be  made  by  debtors  or  withholding  agents  of 
the  normal  tax  of  1  per  cent  withheld  from  interest  payments 
made  upon  bonds  or  other  similar  obligations,  and  it  shall 
bo  filed  on  or  before  March  1  of  each  calendar  year. 

Monthly  List  to  Constitute  a  rart  of  the  Annual  List  Return. 

Art.  51.  The  monthly  list  return  in  the  form  as  re- 
quired herein  shall  constitute  a  part  of  the  annual  list  re- 
turn to  be  made  by  debtors  or  withholding  agents,  and  the 
debtor  or  withholding  agent  will  not  be  required,  in  making 
an  annual  list  return  of  the  tax  withheld  from  income  de- 


Income  Tax  Regulations  109 

rived  from  interest  upon  bonds  and  mortgages  or  deeds  of 
trust,  or  other  similar  obligations  of  corporations,  joint- 
stock  companies,  or  associations  and  insurance  companies, 
to  again  make  an  itemized  list  of  the  amount  of  tax  with- 
held from  each  person,  but  will  give  in  the  annual  list  re- 
turn the  totals  of  the  monthly  list  return  for  each  month  of 
the  year  for  which  annual  list  return  is  made. 

Certificates  to  be  Forwarded  to  Collector. 

All  substitute  certificates  of  collecting  agents,  authorized 
by  regulations,  that  are  received  by  debtors  or  withholding 
agents  will  be  considered  the  same  as  certificates  of  owners, 
and  in  entering  same  in  making  monthly  list  returns  debtors 
or  withholding  agents  will  enter  the  name  and  address  of  the 
collecting  agent  and  the  number  of  the  substitute  certificate 
issued  in  lieu  of  the  original  certificate  containing  the  name 
and  address  of  the  owner  of  the  bonds.  Until  the  further 
ruling  on  this  subject  by  this  department  no  list  return  is 
required  to  be  made  of  certificates  of  ownership  accompany- 
ing coupons  or  registered  interest  orders  filed  with  a  debtor 
or  withholding  agent  when  the  owners  of  the  bonds  are  not 
subject  to  having  the  normal  tax  withheld  at  the  source,  but 
all  such  certificates  of  ownership  shall  be  forwarded  by  the 
debtor  or  withholding  agent  to  the  collector  of  internal  rev- 
enue for  the  district,  on  or  before  the  20th  day  of  the  month 
succeeding  that  in  which  said  certificates  of  ownership  were 
received. 

B 

Income  Derived  from  Interest  Upon  Bonds,  Mort- 
gages, etc.,  Paid  by  First  Bank  or  Collecting  Agen- 
cy When  Certificates  of  Owners  are  not  Filed. 

Interest  Coupons  or  Orders,  Not  Accompanied  by  Certificate. 

Art.  52.  Where  the  coupons  or  interest  orders  are  not 
accompanied  by  certificates  as  heretofore  prescribed,  the  first 
bank,  trust  company,  banking  firm,  or  individual,  or  col- 
lecting agency  receiving  the  coupons  or  interest  orders  for 


110  Federal  Income  Tax 

collection,  or  otherwise,  shall  deduct  and  withhold  the  tax 
and  shall  attach  to  such  coupons  or  interest  orders  its  own 
certificate  (Form  1002),  giving  the  name  and  address  of  the 
owner  of,  or  the  person  presenting  such  coupons  or  interest 
orders  if  the  owner  is  not  known,  with  a  description  of  the 
coupons  or  interest  orders ;  also  setting  forth  the  fact  that 
they  are  withholding  the  tax  upon  them;  whereupon  the 
debtor  shall  not  again  withhold  the  tax  on  said  coupons  or  in- 
terest orders,  but  in  lieu  thereof  shall  deliver  to  the  Collector 
of  Internal  Revenue  the  certificate  of  such  bank,  trust  com- 
pany, etc.,  which  is  withholding  such  tax  money. 

Identity  of  Persons  Presenting  Interest  Coupons  to  be 

Established. 

Any  corporation,  collecting  agency,  or  person  first  receiv- 
ing from  the  owner  any  interest  coupons  or  orders  for  the 
collection  of  registered  interest  should  require  the  persons 
tendering  such  coupons  or  orders  for  registered  interest  to 
satisfactorily  establish  their  identity. 

Monthly  and  Annual  List  Returns. 

Art.  53.  Withholding  agents  receiving  coupons  or  in- 
terest orders  not  accompanied  by  certificates  of  owners  are 
required  to  file  monthly  and  annual  list  returns  in  duplicate. 

The  required  monthly  list  return  (Form  1044)  shall  give 
a  list  of  all  coupon  or  interest  payments  made  on  which  the 
normal  tax  of  1  per  cent  was  deducted  and  withheld  and 
shall  show  the  name  and  address  in  full  of  the  owner  of,  or 
the  person  presenting  such  coupons  or  interest  orders,  if  the 
owner  is  known,  amount  of  the  income  subject  to  tax  and 
the  amount  of  tax  withheld. 

An  annual  list  return  (Form  1044a)  is  also  required  to 
be  made  by  such  withholding  agents,  showing  the  amount  of 
tav  withheld  during  the  preceding  year  on  income  of  this 
character.  This  return  must  be  filed  on  or  before  the  1st 
day  of  March  of  each  calendar  year. 


Income  Tax  Regulations  111 

The  monthly  list  returns  in  the  form  as  required  herein 
shall  constitute  a  part  of  the  annual  list  return  to  be  made, 
and  the  withholding  agent  will  not  be  required,  in  making 
an  annual  list  return  of  the  tax  thus  withheld,  to  again  make 
an  itemized  list  of  the  amount  of  tax  withheld  from  each 
person,  but  will  give  in  the  annual  list  return  the  totals  of 
the  monthly  list  returns  for  the  year  for  which  annual  list 
return  is  made. 

c 

Income  Deeived  from  Coupons,  Checks  oe  Bills  of  Ex- 
change on  Foreign  Bonds,  Mortgages,  Dividends,  etc. 

Collection  of  Coupons,  Checks, Bills  of  Exchange,  etc.  License 
to  be  Obtained  from  Commissioner  of  Internal  Revenue. 

Art.  54.  All  persons,  firms,  or  corporations  undertaking 
for  accommodation  or  profit  (this  includes  handling  either 
by  way  of  purchase  or  collection)  the  collection  of  coupons, 
checks,  bills  of  exchange,  etc.,  for  or  in  payment  of  interest 
upon  bonds  issued  in  foreign  countries,  and  upon  foreign 
mortgages  or  like  obligations,  and  for  any  dividends  upon 
stock  or  interest  upon  obligations  of  foreign  corporations, 
associations,  or  insurance  companies  engaged  in  business  in 
foreign  coimtries,  are  required  by  law  to  obtain  a  license 
from  the  Commissioner  of  Internal  Revenue. 

Application  for  License  to  be  Made  to  Collector  of  District. 

Aet.  55.  Application  for  such  license  (Form  1017)  will 
be  made  to  the  collector  for  the  district  in  which  such  busi- 
ness is  to  be  carried  on.  Upon  the  acceptance  of  such  ap- 
plication the  collector  will  issue  to  the  applicant  without  cost 
a  license  (Form  1010)  which  will  continue  in  force  until 
revoked  or  canceled.  Blank  forms  of  such  license,  bearing 
the  facsimile  signature  of  the  Commissioner  of  Internal 
Revenue,  will  be  furnished  collectors  on  requisition,  who  will 
in  all  cases  countersign  the  same  before  issuing  it  to  appli- 
cant. 


112  Federal  Income  Tax 

Penalty  for  Failure  to  Obtain  License. 

Failure  to  obtain  a  license  or  to  comply  with  regula- 
tions is  punishable  by  a  fine  not  exceeding  $5,000  or  im- 
prisonment not  exceeding  one  year,  or  both,  in  the  discretion 
of  the  court. 

Bond  May  be  Required  in  Certain  Cases. 

Art.  56.  Where  the  collector  is  not  sufficiently  informed 
as  to  the  entire  responsibility  of  the  applicant,  or  where  in 
any  case  he  deems  it  advisable,  the  Commissioner  of  Internal 
Revenue  may  upon  the  recommendation  of  the  collector  re- 
quire of  the  applicant  a  bond,  in  duplicate,  with  satisfactory 
sureties,  in  a  penal  sum  at  least  equal  to  the  estimated  amount 
of  tax  to  be  withheld  by  such  applicant  during  any  one  year. 
A  form  of  bond  to  be  given  in  such  cases  will  be  furnished 
collectors  on  application  for  the  same.  Where  licenses  are 
issued  without  bond,  the  collector  will  each  year  inquire  into 
and  satisfy  himself  of  the  financial  responsibility  of  the 
licensee. 

License  to  be  Obtained  for  Branch  Offices.  Application  for 
License  to  be  Certified  to  Collector  of  District  in  Which 
Branch  Offices  Are  Located. 

Art.  57.  When  any  person,  firm,  or  corporation  shall 
have  branch  offices  and  desire  to  collect  foreign  interest  or 
dividend  income  through  said  branch  offices,  the  application 
for  license  or  licenses  shall  be  made  by  the  person,  firm,  or 
corporation  through  its  principal  office  for  its  branch  office 
or  offices.  Application  for  licenses  in  such  cases  shall  be 
made  to  the  collector  of  internal  revenue  for  the  district  in 
which  the  home  office  is  located.  The  names  and  addresses  of 
the  branch  offices  shall  be  furnished  to  the  collector  in  the 
application  of  the  said  principal,  and  if  the  requirements  of 
the  foregoing  regulations  have  been  complied  with  to  the  sat- 
isfaction of  the  collector,  he  shall  certify  this  fact  to  the  col- 
lector of  internal  revenue  for  the  district  in  which  the 
branch  office  is  located,  and  the  collector  to  whom  this  cer- 


Income  Tax  Regulations  113 

tification  is  made  shall  issue  to  such  branch  office  a  license, 
as  in  the  case  provided  in  Article  55. 

Normal  Tax  on  Interest  Collected  to  be  Withheld  by  Agent. 
Statement  as  to  Tax  Withheld  to  be  Indorsed  or  Appended 
to  Coupons,  Checks,  etc. 

Art.  58.  The  licensed  person,  firm,  or  corporation  first 
receiving  any  such  foreign  items  for  collection  or  otherwise 
shall  withhold  therefrom  the  normal  tax  of  1  per  cent,  and 
will  be  held  responsible  therefor.  Such  licensee  shall  in- 
dorse or  stamp  on  each  such  coupon,  check,  or  bill  of  ex- 
change, when  practicable,  the  words  "Income  tax  withheld 
by"  (giving  his  or  their  name,  address,  and  date),  which 
shall  be  sufficient  evidence  to  relieve  subsequent  holders  or 
purchasers  from  the  duty  of  also  withholding  the  income 
tax. 

If  the  size  or  nature  of  such  coupons,  checks,  etc.,  makes  it 
impracticable  to  make  said  indorsement  thereon,  a  state- 
ment identifying  the  item  on  which  tax  is  withheld  and  bear- 
ing said  indorsement  may  be  attached  thereto  with  the  same 
effect  as  if  the  indorsement  was  made  directly  thereon. 
(Amended  T.  D.  2023.) 

Licensee  to  Furnish  Collector  of  District  with  List  of  Taxes 
Deducted,  etc. 

Aet.  59.  Such  licensee  shall  obtain  the  names  and  ad- 
dresses of  the  persons  from  whom  such  items  are  received 
and  shall  prepare  a  list  of  same  in  duplicate  (on  Form  1043) 
and  file  it  with  the  collector  of  internal  revenue  for  his  dis- 
trict not  later  than  the  20th  day  of  the  month  next  succeed- 
ing the  month  in  which  such  items  were  paid.  The  list  shall 
be  dated,  and  shall  contain  the  names  and  addresses  of  the 
taxable  persons,  the  character  and  amount  of  income,  amount 
of  exemption  claimed,  amount  of  income  on  which  with- 
holding agent  is  liable  for  tax,  and  the  amount  of  tax  with- 
held. In  addition  to  the  monthly  lists  the  licensee  will,  on  or 
before  the  1st  day  of  March  in  each  year,  file  with  the  col- 
8 


114  Federal  Income  Tax 

lector  in  duplicate  a  return  (Form  1043a),  showing  tho 
amount  of  income  paid  and  the  amount  of  tax  withheld  by 
him  during  the  preceding  year  and  such  other  information 
as  the  form  prescribes. 

The  monthly  list  return  in  the  form  as  required  herein 
shall  constitute  a  part  of  the  annual  list  return  to  be  made 
by  the  licensee  as  withholding  agent,  and  he  will  not  be  re- 
quired, in  making  an  annual  list  return  of  the  tax  withheld 
from  income  described  in  Article  54,  to  again  make  an  item- 
ized list  of  the  amount  of  tax  withheld  from  each  person, 
but  will  give  in  the  annual  list  return  the  totals  of  the 
monthly  list  return  for  each  month  of  the  year  for  which 
annual  list  return  is  made. 

Claims  for  Exemption  Under  Paragraph  C  May  be  Filed. 
Organizations  Exempt  from  Having  Tax  Withheld  at  the 
Source. 

Art.  60.  In  the  event  such  coupons,  checks,  or  bills  of 
exchange  above  mentioned  are  presented  for  collection  by 
an  individual  claiming  the  benefit  of  the  exemptions  allow- 
able under  paragraph  C  (Arts.  9  and  10),  such  individual 
shall  be  permitted  to  avail  himself  of  the  exemption  claimed, 
upon  signing  on  the  form  heretofore  prescribed  for  cou- 
pons payable  in  the  United  States,  and  no  tax  shall  be  de- 
ducted for  the  amount  of  the  exemption  so  claimed ;  or  if 
such  items  are  presented  by  corporations,  joint-stock  com- 
panies, or  associations  and  insurance  companies,  organized 
in  the  United  States,  the  form  of  certificate  heretofore  pre- 
scribed for  such  organizations  shall  be  used,  and  in  such 
instances  no  tax  shall  be  deducted. 

Certificates  of  Exemption  to  be  Forwarded  with  Monthly 
List  Returns  to  Collector. 

Art.  61.  In  both  instances  the  licensee  first  receiving 
such  items  shall  retain  such  certificates  for  delivery  with 
the  list  aforesaid,  and  with  respect  to  said  coupons,  checks, 
or  bills  of  exchange,  said  licensee  shall  attach  thereto  (iden- 


Income  Tax  Regulations  115 

tifying  the  items)  or  indorse  or  stamp  thereon  the  words 
"Income  tax  exemption  claimed  through"  (giving  name 
and  address  of  licensee),  which  shall  be  sufficient  evidence 
to  relieve  subsequent  holders  or  purchasers  from  the  duty  of 
also  withholding  the  tax  thereon. 

The  provisions  for  collection  of  the  tax  on  foreign  obli- 
gations herein  set  forth  includes  the  interest  upon  all  for- 
eign bonds,  even  though  the  coupons  may,  at  the  option  of 
the  holder,  be  payable  in  the  United  States  as  well  as  in 
some  foreign  country. 

Licensee  to  Keep  Records. 
Art.  62.     All  persons  licensed  shall  keep  their  records  in 
such  manner  as  to  show  from  whom  every  such  item  has 
been  received,  and  such  records  shall  be  open  at  all  times  to 
the  inspection  of  internal  revenue  officers. 


Income  Derived  from  Wages,  Rent,  Interest,  or  Other 
Fixed  and  Determinable  Gains,  Profits,  and  Income. 

Wages,  Salaries,  Rents,  etc. 

Art.  63.  The  above  title  includes  all  income  derived  from 
salaries,  wages,  rents,  royalties,  interest,  taxable  annuities, 
emoluments,  or  other  fixed  and  determinable  annual  gains, 
profits,  and  income  of  another  person.  ("Income  derived 
from  interest  upon  bonds  and  mortgages,  or  deeds  of  trust, 
or  other  similar  obligations  of  corporations,  etc.,"  and  "In- 
come derived  from  coupons,  checks,  or  bills  of  exchange  on 
foreign  bonds,  mortgages,  dividends,  etc.,"  which  have  been 
covered  by  regulations  under  such  titles,  are  not  to  be  in- 
cluded here.) 

Withholding  Agents  to  Deduct  and  Pay  Tax. 
Art.  64.     Copartnerships,  companies,  corporations,  joint- 
stock   companies   or   associations,    insurance   companies,    in 
whatever  capacity  acting,  including  lessees,   mortgagors  of 


116  Federal  Income  Tax 

real  or  personal  property,  trustees  acting  in  any  trust  capac- 
ity, executors,  administrators,  agents,  receivers,  conservators, 
employers  and  all  officers  and  employees  of  the  United  States, 
hereinafter  referred  to  as  "debtors"  or  withholding  agents, 
having  the  control,  receipt,  custody,  disposal,  or  payment  of 
income  as  described  in  Article  63,  shall  deduct  and  withhold 
from  such  annual  gains,  profit,  and  income,  when  the  same 
shall  have  reached  an  aggregate  amount  in  excess  of  $3,000, 
such  sum  as  will  be  sufficient  to  pay  the  normal  tax  of  1  per 
cent  imposed  by  law,  and  shall  pay  the  taxes  so  withheld  to 
the  collector  of  internal  revenue  for  the  district  in  which  the 
said  withholding  agent  resides  or  has  his,  her,  or  its  principal 
place  of  business. 

Tax  to  be  Withheld  on  Periodical  Payments  When  They 
Aggregate  $8,000.  Exemption  Under  Paragraph  C  May 
be  Claimed. 

Art.  65.  A  withholding  agent  who  pays  monthly,  or 
periodically  during  the  year,  interest,  rents,  salaries,  wages, 
etc.,  shall  not  withhold  the  said  tax  until  such  time  as  the 
interest,  rents,  salaries,  wages,  etc.,  shall  have  reached  an 
aggregate  amount  in  excess  of  $3,000.  When  such  amount 
has  been  reached,  such  agent  shall  withhold  the  tax  on  the 
whole  $3,000  and  any  excess  thereof,  unless  the  person  to 
whom  the  income  is  due  files  a  notice  claiming  exemption 
under  paragraph  C  (as  provided  in  Art.  33  a),  in  which 
case  the  withholding  agent  shall  withhold  only  the  tax  on 
the  income  in  excess  of  said  exemption  of  $3,000  or  $4,000 
(as  the  case  may  be),  and  the  tax  so  withheld  shall  be  paid 
as  required  by  law. 

Deductions  Under  Paragraph  B  May  be  Claimed. 

Art.  66.  In  case  the  person  to  whom  the  income  is  due 
is  entitled  to  any  deductions  under  paragraph  B,  he  may 
avail  himself  of  such  deductions  by  filing  with  the  withhold- 
ing agent  Form  1008,  as  provided  in  Articule  33(b),  in  which 


Income  Tax  Regulations  117 

case  the  withholding  agent  will  only  withhold  the  tax  on  such 
income  in  excess  of  the  deductions  claimed  on  said  form. 

Tax  Not  to  be  Withheld  by  Banks  on  Interest  Paid  on 
Deposits. 

Art.  67.  Banks,  bankers,  trust  companies,  and  other  bank- 
ing institutions  receiving  deposits  of  money,  are  not  required 
to  withhold  at  the  source  the  normal  income  tax  of  1  per  cent 
on  interest  paid,  or  accrued,  or  accruing  to  depositors,  whether 
on  open  accounts  or  on  certificates  of  deposit;  but  all  such 
interest,  whether  paid  or  accrued  and  unpaid,  must  be  in- 
cluded in  the  annual  income  return  of  the  person  entitled  to 
receive  such  interest,  whether  on  open  account  or  on  the  cer- 
tificate of  deposit. 

Tax  to  be  Withheld  on  Payment  of  Interest  Notes,  or  Notes 
Given  for  Rent. 
Art.  68.  When  a  note  shall  have  been  given  in  payment 
of  interest,  rents,  or  other  income  accruing  after  March  1, 
1913,  the  maker  of  the  note,  as  the  "debtor"  and  as  the 
"source"  where  the  income  originates,  is  required,  in  paying 
such  note,  to  withhold  the  normal  tax  of  1  per  cent  on  the 
entire  amount  of  the  note,  if  in  excess  of  $3,000,  unless  claim 
for  exemption  or  deductions  under  Article  33(a)  or  33(b)  is 
filed,  in  which  case  the  said  tax  shall  be  withheld  only  on 
the  amount  of  said  note  in  excess  of  the  exemption  or  deduc- 
tions so  claimed. 

Purchasers  of  Interest  Notes  as  to  Which  Tax  Has  Not  Been 

Withheld. 
If  any  person  who  has  purchased  or  discounted  any  such 
notes  omitted,  in  acquiring  them  from  previous  holder,  to 
make  a  deduction  or  allowance  for  said  tax,  he  can  look  for 
relief  only  to  the  person  from  whom  the  notes  were  obtained, 
as  the  "debtor,"  the  maker  of  said  notes,  is  required  to  deduct, 
withhold,  and  pay  to  the  collector  of  internal  revenue  the 
amount  of  the  normal  tax  of  1  per  cent  which  may  be  due 
thereon. 


118  Federal  Income  Tax 

Annual  List  Return  by  Withholding  Agents. 

Art.  69.  Withholding  agents  shall  make  an  annual  list 
return  (Form  1042),  in  duplicate,  to  the  collector  of  internal 
revenue  for  the  district  in  which  the  withholding  agent  re- 
sides or  has  his  principal  place  of  business  on  or  before  the 
1st  day  of  March  in  each  year,  showing  the  names  and  ad- 
dresses of  persons  who  have  received  incomes  in  excess  of 
$3,000,  on  which  the  normal  tax  of  1  per  cent  has  been  de- 
ducted and  withheld  during  the  preceding  year.  This  return 
must  be  accompanied  by  all  forms  presented  claiming  ex- 
emptions and  deductions. 

E 

Fiduciaries. 

(See  T.  D.  1943  and  T.  D.  1961.) 

Guardians,  etc.,  as  Fiduciary  Agents,  to  Deduct  Tax.  Notice 
of  Deduction  to  be  Filed  with  Other  Withholding  Agents. 

Art.  70.  Guardians,  trustees,  executors,  administrators, 
agents,  receivers,  conservators,  and  all  persons,  corporations, 
or  associations  acting  in  any  fiduciary  capacity,  hereinafter 
referred  to  as  fiduciary  agents,  who  hold  in  trust  an  estate 
of  another  person  or  persons,  shall  be  designated  the  "source" 
for  the  purpose  of  collecting  the  income  tax,  and  by  filing 
notice  with  other  debtors  or  withholding  agents  said  fiduciary 
shall  be  exempt  from  having  any  income,  due  to  them  as  such, 
withheld  for  any  income  tax  by  any  other  debtor  or  withhold- 
ing agent.  Other  debtors  or  withholding  agents  upon  receipt 
of  such  notice  shall  not  withhold  any  part  of  such  income 
from  said  fiduciary  and  will  not  in  such  case  be  held  liable 
for  normal  tax  of  1  per  cent  due  thereon.  The  form  of  notice 
to  be  filed  with  the  debtor  or  withholding  agent  by  fiduciary 
will  be  on  Form  1015.  Where  such  exemption  is  not  claimed, 
notice  thereof  on  Form  1019  should  be  filed  with  the  with- 
holding agent. 


Income  Tax  Regulations  119 

Annual  Return  to  be  Made  to  the  Collector  of  the  District. 

Art.  71.  Fiduciaries  shall,  on  or  before  March  1  of  each 
year,  make  and  render  a  return  of  the  income  coming  into 
their  custody  or  control  and  management  from  each  trust  or 
estate  when  the  annual  interest  of  any  beneficiary  in  said 
trust  or  estate  is  in  excess  of  $3,000.  This  return  (Form 
1041)  must  be  filed  with  the  collector  for  the  district  in  which 
the  fiduciary  resides  or  has  his  principal  place  of  business, 
and  shall  contain  an  itemized  statement  of  the  gross  income 
and  deductions  claimed. 

Notice  of  failure  to  file  return  as  required  shall  be  served 
upon  the  fiduciary.     (See  Art.  18.) 

The  entries  on  the  first  page  of  Form  1041  in  column 
headed  "Amount  of  income  paid  or  accrued  to  beneficiaries" 
should  not  include  their  respective  shares  of  income  derived 
from  dividends  on  the  stock  or  from  the  net  earnings  of  cor- 
porations, joint-stock  companies,  etc.,  subject  to  like  tax  or 
the  income  on  which  the  normal  tax  of  1  per  cent  has  been 
deducted  and  withheld  at  the  source  by  the  debtor  or  the  prior 
withholding  agent,  as  these  two  items  of  income  are  treated 
as  deductions  in  determining  the  amount  of  income  subject 
to  tax  for  which  the  fiduciary  as  withholding  agent  has  to 
account. 

When  the  share  of  any  beneficiary,  therefore,  in  the  amount 
stated  on  line  3  of  the  first  page  of  said  return  is  in  excess 
of  $3,000,  return  must  be  made. 

Return  to  Include  Only  Income  Accruing  from  Trust, 
Unless  Otherwise  Authorized  by  Beneficiary. 

Art.  72.  As  each  such  fiduciary  acts  solely  in  behalf  of  the 
beneficiaries  of  the  trust,  the  annual  return  required  in  such 
cases  has  reference  only  to  the  income  accruing  and  payable 
through  said  fiduciary,  and  not  to  the  income  of  the  benefici- 
ary derived  from  other  sources.  If,  however,  such  fiduciary 
is  legally  authorized  to  act  for  such  beneficiary  as  agent  or 
attorney  in  fact,  he  may  in  such  case  also  make  for  the  bene- 
ficiary the  personal  annual  return  (Form  1040)  required 
by  law. 


120  Federal  Income  Tax 

Annual  Return  to  Include  List  of  Beneficiaries,  Showing 
Tax  Withheld  from  Each. 
Aet.  73.  The  annual  return  of  the  fiduciary  shall  contain 
a  list  of  the  name  and  full  address  of  each  beneficiary  and 
the  share  of  said  income  to  which  each  may  be  entitled.  There 
must  also  be  entered  opposite  the  name  of  each  beneficiary 
the  amount  of  exemption,  if  any,  claimed  by  him,  the  amount 
of  income  on  which  the  fiduciary  is  liable  for  tax,  and  the 
amount  of  tax  withheld,  and  the  said  return  shall  be  signed 
and  sworn  to  by  the  fiduciary,  if  an  individual,  making 
same,  and  his  full  address  must  be  stated.  If  the  fiduciary 
is  an  organization,  the  return  shall  be  signed  and  sworn  to 
by  the  president,  secretary,  or  treasurer  of  said  organization. 

Return  to  be  Made  of  Undistributed  Income  Accruing  Dur- 
ing the  Year.  Claim  for  Exemption  of  Undistributed  In- 
come.    Paragraph  C. 

Aet.  74.  Fiduciaries  having  control  of  any  portion  of  an 
annual  income  accruing  during  the  year,  but  not  distributed 
or  paid  to  the  beneficiaries  during  the  year,  shall,  in  render- 
ing their  annual  return  (Form  1041),  give  the  name  and 
address  of  each  of  said  beneficiaries  having  a  distributive 
interest  in  said  income,  and  shall  furnish  all  information 
called  for  in  such  returns.  The  fiduciary  shall  in  all  such 
cases  withhold  and  pay  to  the  collector,  as  provided  by  law, 
the  normal  tax  of  1  per  cent  upon  the  distributive  interest 
of  each  of  said  beneficiaries  when  in  excess  of  $3,000,  the 
same  as  if  said  income  was  actually  distributed  and  paid. 
Exemption  under  paragraph  C,  however,  may  be  claimed  by 
the  beneficiary  or  his  legal  representative  by  filing  his  claim 
for  exemption  with  the  fiduciary  agent. 

Tax  Withheld  on  Undivided  Income  Not  to  be  Again 
Withheld  When  Income  is  Distributed. 

Aet.  75.  When  the  normal  tax  on  undivided  annual  net 
income  has  been  so  withheld,  such  tax  shall  not  be  again 
withheld  when  such  portion  of  the  income  is  actually  distrib- 
uted and  paid  to  said  beneficiary. 


PART  3 

Relating  to  the  Income  Tax  Imposed  by  Sections  2  and 
4  of  the  Act  of  October  3,  1913,  on  Corpobations, 
Joint-stock  Companies  or  Associations,  and  Insur- 
ance Companies. 

Organizations  Subject  to  Tax.     One  Per  Cent  on  Entire  Net 

Income. 

Art.  76.  Under  the  provisions  of  sections  2  and  4  of  the 
act  of  October  3,  1913,  every  corporation,  joint-stock  com- 
pany or  association,  and  every  insurance  company  organized 
in  the  United  States,  no  matter  how  created  or  organized, 
except  those  specifically  exempted,  shall  be  subject  to  pay 
annually  an  income  tax  of  1  per  centum  per  annum  upon  the 
entire  net  income  arising  or  accruing  from  all  sources  during 
the  preceding  calendar  or  fiscal  year,  as  the  case  may  be. 
Certain  exceptions  as  to  taxability  will  be  noted  specifically 
hereinafter. 

Foreign  Corporations  Subject  to  the  Tax. 

Art.  77.  A  similar  tax  shall  be  levied,  assessed  against, 
and  paid  annually  by  corporations,  joint-stock  companies  or 
associations,  and  insurance  companies  organized,  authorized, 
or  existing  under  the  laws  of  any  foreign  country  upon  the 
amount  of  net  income  accruing  from  business  transacted  and 
capital  invested  within  the  United  States  during  such  year. 

Corporations  Defined. 
Art.  78.  "Corporation"  or  "corporations,"  as  used  in  these 
Regulations,  shall  be  construed  to  include  all  corporations, 
joint-stock  companies  or  associations,  and  all  insurance  com- 
panies coming  within  the  terms  of  the  law,  and  such  organi- 
zations will  hereinafter  be  referred  to  as  "corporations." 

Associations,  Real  Estate  Trusts,  Etc.,  Subject  to  Tax. 
Art.  79.  It  is  immaterial  how  such  corporations  are  cre- 
ated or  organized.     The  terms  "joint-stock  companies"  or 


122  Federal  Income  Tax 

"associations"  shall  include  associates,  real  estate  trusts,  or 
by  whatever  name  known,  which  carry  on  or  do  business  in 
an  organized  capacity,  whether  organized  under  and  pursu- 
ant to  State  laws,  trust  agreements,  declarations  of  trusts,  or 
otherwise,  the  net  income  of  which,  if  any,  is  distributed,  or 
distributable,  among  the  members  or  share  owners  on  the 
basis  of  the  capital  stock  which  each  holds,  or,  where  there 
is  no  capital  stock,  on  the  basis  of  the  proportionate  share  of 
capital  which  each  has  invested  in  the  business  or  property 
of  the  organization,  all  of  which  joint-stock  companies  or 
associations  shall,  in  their  organized  capacity,  be  subject  to 
the  tax  imposed  by  this  act. 

Corporations  Required  to  Make  Returns.     Mutual  Telephone 
and  Mutual  Insurance  Companies  Not  Exempt. 

Art.  80.  Every  corporation  not  specifically  enumerated  as 
exempt  shall  make  the  return  of  annual  net  income  required 
by  law  whether  or  not  it  may  have  any  income  liable  to  tax, 
or  whether  or  not  it  shall  be  subordinate  to  or  controlled  by 
another  corporation.  Mutual  telephone  companies,  mutual 
insurance  companies,  and  like  organizations,  although  local 
in  character,  and  whose  income  consists  largely  from  assess- 
ments, dues,  and  fees  paid  by  members,  do  not  come  within 
the  class  of  corporations  specifically  enumerated  as  exempt. 
Their  status  under  the  law  is  not  dependent  upon  whether 
they  are  or  are  not  organized  for  profit.  Not  coming  within 
the  statutory  exemption,  all  organizations  of  this  character 
will  be  required  to  make  returns  of  annual  net  income,  and 
pay  any  income  tax  thereby  shown  to  be  due.  For  this  pur- 
pose the  surplus  of  receipts  of  the  year  over  expenses  will 
constitute  the  net  income  upon  which  the  tax  will  be  assessed. 

A  railroad  or  other  corporation  which  has  leased  its  prop- 
erties in  consideration  of  a  rental  equivalent  to  a  certain  rate 
of  dividends  on  its  outstanding  capital  stock  and  the  interest 
on  the  bended  indebtedness,  and  such  rental  is  paid  by  the 
lessee  directly  to  the  stock  and  bond  holders,  should,  never- 


Income  Tax  Kegulations  123 

theless,  make  a  return  of  annual  net  income  showing  the 
rental  so  paid  as  having  been  received  by  the  corporation. 

Interest  Deduction   by   Corporations   Operating  Leased   or 
Purchased  Lines. 

Art.  81.  A  railroad  company  operating  leased  or  pur- 
chased lines  shall  include  all  receipts  derived  therefrom,  and, 
if  bonded  indebtedness  of  such  lines  has  been  assumed,  such 
operating  company  may  deduct  the  interest  paid  thereon  to 
an  amount  not  exceeding  one-half  of  the  sum  of  its  interest- 
bearing  indebtedness  and  its  paid-up  capital  stock  outstand- 
ing at  the  close  of  the  year. 

Lessee  Corporations  Not  to  Include  Capital  Stock  or  Indebt- 
edness of  Lessor  Corporations. 

Art.  82.  Corporations  operating  leased  lines  should  not 
include  the  capital  stock  of  the  lessor  corporations  in  their 
own  statement  of  capital  stock  outstanding  at  the  close  of  the 
year.  The  indebtedness  of  such  lessor  corporations  should 
not  be  included  in  the  statement  of  the  indebtedness  of  the 
lessee  unless  the  lessee  has  assumed  the  same.  Each  leased 
or  subsidiary  company  will  make  its  own  separate  return, 
accounting  for  therein  all  income  which  it  may  have  received 
by  way  of  dividends,  rentals,  interest,  or  from  any  other 
source. 

Foreign   Corporations   Having   Branch    Offices   in    United 
States  to  Designate  Principal  Office. 

Art.  83.  A  foreign  corporation  having  several  branch 
offices  in  the  United  States  should  designate  one  of  such 
branches  as  its  principal  office  and  should  also  designate  the 
proper  officers  to  make  the  required  return. 

Corporations  Organized  During  Year  to  Make  Returns. 

Art.  84.  A  corporation  organized  during  the  year  should 
render  a  sworn  return  on  the  prescribed  form,  covering  that 
portion  of  the  year  (calendar  or  fiscal)  during  which  it  was 
engaged  in  business  or  had  an  income  accruing  to  it. 


124  Federal  Income  Tax 

Corporations  Going  Into  Liquidation. 

Art.  85.  Corporations  going  into  liquidation  during  any 
tax  period  may,  at  the  time  of  such  liquidation,  prepare  a 
"final  return"  covering  the  income  received  or  accrued  to 
them  during  the  fractional  part  of  the  year  during  which 
they  were  engaged  in  business,  and  immediately  file  the  same 
with  the  collector  of  the  district  in  which  the  corporations 
have  their  principal  places  of  business. 

Limited  Partnerships. 

Art.  86.  Limited  partnerships  are  held  to  be  corporations 
within  the  meaning  of  this  act  and  these  regulations,  and  in 
their  organized  capacity  are  subject  to  the  Income  Tax  as 
corporations. 

Corporations  Exempt  from  Tax. 

Art.  87.  The  act  specifically  enumerates  and  exempts  from 
its  provisions  and  requirements,  labor,  agricultural  or  horti- 
cultural organizations,  mutual  savings  banks  not  having  a 
capital  stock  represented  by  shares,  fraternal  beneficiary  so- 
cieties, orders,  or  associations  operating  under  the  lodge  sys- 
tem, or  for  the  exclusive  benefit  of  the  members  of  a  fra- 
ternity itself  operating  under  the  lodge  system,  and  provid- 
ing for  the  payment  of  life,  sick,  accident,  and  other  benefits 
to  the  members  of  such  societies,  orders,  or  associations,  and 
dependents  of  such  members,  domestic  building  and  loan 
associations,  cemetery  companies  organized  and  operated  ex- 
clusively for  the  mutual  benefit  of  their  members,  any  and 
all  corporations  or  associations  organized  and  operated  ex- 
clusively for  religious,  charitable,  scientific,  or  educational 
purposes,  no  part  of  whose  net  income  inures  to  the  benefit 
of  any  private  stockholder  or  individual,  business  leagues, 
chambers  of  commerce,  or  boards  of  trade  not  organized  for 
profit,  no  part  of  the  net  income  of  which  inures  to  the  benefit 
of  the  private  stockholder  or  individual,  and  civic  leagues 
or  similar  organizations  not  organized  for  profit,  but  operated 
exclusively  for  the  promotion  of  social  welfare. 


Income  Tax  Regulations  125 

Domestic  Building  and  Loan  Associations  Defined. 
Mutuality  Essential. 

Domestic  building  and  loan  associations  are  among  those 
enumerated  as  exempt  from  the  requirements  of  the  law.  A 
domestic  building  and  loan  association  is  held  to  be  one  or- 
ganized under  and  pursuant  to  the  laws  of  the  United  States, 
or  of  a  State  or  Territory  thereof,  or  under  the  laws  appli- 
cable to  Alaska  or  the  District  of  Columbia.  Mutuality  in 
operation  and  in  the  distribution  of  profits  and  benefits  is 
essential  to  exemption.  Therefore,  in  order  to  come  within 
the  exempted  class  such  associations  must  not  only  be  "Do- 
mestic," as  defined,  but  they  must  be  organized  and  operated 
exclusively  for  the  mutual  benefit  of  the  members ;  that  is, 
all  the  profits  and  benefits  provided  for  in  the  articles  of  asso- 
ciation and  by-laws  must  be  ratably  distributed  among  all 
members  regardless  of  the  kind  of  stock  held,  according  to 
the  amount  of  money  they  have  on  deposit.  An  association 
issuing  different  classes  of  stock  upon  which  different  rates 
of  interest  or  dividends  are  guaranteed  or  paid,  does  not  come 
within  the  exempted  class. 

Corporations  Must  Establish  Their  Right  to  Exemption. 

Aet.  88.  All  corporations  and  all  beneficiary  societies 
enumerated  above  shall,  by  affidavit,  or  otherwise,  at  the  re- 
quest of  the  Collector  or  Commissioner  of  Internal  Revenue, 
establish  their  right  to  the  exemption  provided,  in  which  case 
it  will  not  be  sufficient  to  merely  declare  that  they  are  exempt, 
but  they  must  show  the  character  and  purpose  of  the  organi- 
zation, the  manner  of  distributing  the  net  income,  if  any,  or 
that  none  of  the  net  income  inures  to  the  benefit  of  any  pri- 
vate stockholder  or  individual.  In  the  absence  of  such  a 
showing,  such  organizations  may,  at  any  time,  be  required  to 
make  returns  of  annual  net  income  or  disclose  their  books 
of  account  to  a  revenue  officer  for  examination  in  order  that 
the  status  of  the  company  may  be  determined. 


126  Federal  Income  Tax 

Society  or  Association  Subject  to  Exemption  Defined. 

Aet.  89.  A  society  or  association  "operating  under  the 
lodge  system"  is  considered  to  be  one  organized  under  a 
charter,  with  properly  appointed  or  elected  officers,  with  an 
adopted  ritual  or  ceremonial,  holding  meetings  at  stated  in- 
tervals, and  supported  by  fees,  dues,  or  assessments. 

Cemetery  Companies  Organized  for  Mutual  Benefit  of  Their 
Members,  Exempt. 
Aet.  90.  Cemetery  companies  organized  and  operated  ex- 
clusively for  the  mutual  benefit  of  their  members  are  exempt. 
The  provisions  of  the  law  clearly  indicate  that  companies 
which  operate  cemeteries  for  profit  are  liable  to  the  tax.  The 
status  of  cemetery  associations  under  the  law  will,  therefore, 
depend  upon  the  character  and  purpose  of  the  organization 
and  what  disposition  is  made  of  the  income. 

Corporations  Whose  Status  as  to  Exemption  is  in  Doubt  Must 
Make  Return. 
Aet.  91.  Any  corporation,  concerning  whose  status  under 
the  law  there  is  any  doubt,  or  which  does  not  clearly  come 
within  one  or  another  of  the  classes  of  those  specifically  enu- 
merated as  exempt,  should  file  a  return  (in  blank  if  desired) 
and  attach  thereto  a  statement  setting  out  fully  the  nature 
and  purpose  of  the  organization,  the  source  of  its  income,  and 
what  disposition  is  made  of  it,  and  particularly  of  any 
surplus. 

Cooperative  Dairies  Not  Issuing  Stock  and  Allowing  Patrons 
Dividends ,  Exempt. 
Aet.  92.  Cooperative  dairies  not  issuing  stock  and  allow- 
ing patrons  dividends  based  on  butter-fat  in  milk  furnished 
are  not  liable.  In  such  case  the  "dividends"  are  the  purchase 
price  of  the  raw  material  furnished. 

When  Income  from  Public  Utilities  is  Not  Taxable.   Persons 
or  Corporations  Not  Exempt. 
Aet.  93.  The  income  derived  from  any  public  utility  or 
from  the  exercise  of  any  essential  governmental  function, 


Income  Tax  Regulations  127 

which  income  accrues  to  any  State,  Territory,  the  District 
of  Columbia,  or  any  political  subdivision  of  a  State,  Terri- 
tory, or  the  District  of  Columbia,  and  any  income  accruing 
to  the  Government  of  the  Philippine  Islands,  or  to  Porto 
Rico,  shall  not  be  subject  to.  the  tax  imposed  by  this  act.  In 
cases  wherein  any  State,  Territory,  or  the  District  of  Colum- 
bia, or  any  political  subdivision  of  a  State  or  Territory  shall 
have,  prior  to  the  passage  of  this  act,  contracted  in  good  faith 
with  any  person  or  corporation  to  acquire,  construct,  operate, 
or  maintain  a  public  utility,  no  income  tax  pursuant  to  this 
act  shall  be  levied  upon  the  income  derived  from  the  opera- 
tion of  such  public  utility,  so  far  as  the  assessment  and  pay- 
ment of  such  tax  will  impose  a  loss  or  burden  upon  such  State, 
Territory,  District  of  Columbia,  or  political  subdivision.  But 
the  person  or  corporation  is  not  relieved  from  the  payment 
of  the  tax  upon  that  portion  of  the  income  accruing  to  him, 
or  it,  under  such  contract. 

Partnerships  Not  Taxable  as  Corporations. 

Aet.  94.  Ordinary  copartnerships  are  not,  as  such,  subject 
to  the  tax  imposed  by  this  act,  but  the  individual  members  of 
any  such  partnership  are  liable  for  income  tax  only  in  their 
individual  capacity  on  their  respective  shares  of  the  earnings 
of  such  partnership,  whether  such  earnings  be  distributed  or 
not. 

What  Constitutes  Paid-up  Capital  Stock. 

Aet.  95.  Full  amount  of  stock,  as  represented  by  the  par 
value  of  the  shares  issued,  is  to  be  regarded  as  the  paid-up 
capital  stock,  except  when  such  stock  is  assessable  on  account 
of  deferred  payments,  or  payable  in  installments,  in  which 
case  the  amount  actually  paid  on  such  shares  will  constitute 
the  actual  paid-up  capital  stock  of  the  corporation. 

Gross  Income,  How  Determined. 
Aet.  96.  The  following  definitions  and  rules  are  given  for 
determining  the  gross  income  of  various  classes  of  corpora- 
tions : 


128  Federal  Income  Tax 

Gross  Income  of  Banks  and  Other  Financial  Institutions. 

Gross  income  of  banks  and  other  financial  institutions 
consists  of  the  total  revenue  derived  from  the  operation  of 
the  business,  including  income,  gains,  or  profits  from  all 
other  sources,  as  shown  by  the  entries  on  the  books  of  account, 
within  the  calendar  or  fiscal  year  for  which  the  return  is 
made. 

Gross  Income  of  Insurance  Companies. 

Art.  97.  Gross  income  of  insurance  companies  consists  of 
the  total  revenue  derived  from  the  operation  of  the  business, 
including  income,  gains,  or  profits  from  all  other  sources,  as 
shown  by  the  entries  on  the  books  of  account  within  the  cal- 
endar or  fiscal  year  for  which  the  return  is  made,  except  as 
modified  by  the  express  exemptions  of  the  articles  which 
apply  to  mutual  fire,  mutual  marine,  and  life  insurance  com- 
panies. 

Gross  Income   of  Mutual  Fire  Insurance   Companies. 

Art.  98.  Mutual  fire  insurance  companies  which  require 
their  members  to  make  premium  deposits  to  provide  for 
losses  and  expenses  shall  not  return  as  gross  income  any  pro- 
tion  of  the  premium  deposits  returned  to  their  policyholders, 
but  shall  return  as  taxable  income  all  income  received  by 
them  from  all  other  sources  plus  such  portions  of  the  pre- 
mium deposits  as  are  retained  by  the  companies  for  purposes 
other  than  the  payment  of  losses  and  expenses  and  reinsur- 
ance reserves. 

Mutual  Marine  Insurance  Companies. 

Art.  99.  Mutual  marine  insurance  companies  may  in- 
clude in  their  deductions  from  gross  income  amounts  repaid 
to  policyholders  on  account  of  premiums  previously  paid  by 
them  and  interest  paid  upon  such  amounts  between  the  ascer- 
tainment thereof  and  the  payment  thereof,  such  amounts  and 
interest  having  been  included  in  gross  income. 


Income  Tax  Regulations  129 

Deferred  Dividends  Deductible,  When. 

Aet.  100.  Life  insurance  companies  are  authorized  to 
omit  from  gross  income  such  portion  of  any  actual  premium 
received  from  any  individual  policyholder  as  shall  have  been 
paid  back  or  credited  to  the  policyholder  or  treated  as  an 
abatement  of  his  premium.  In  so  far  as  "deferred  divi- 
dends" payable  at  a  stated  period  represent  "a  portion  of 
any  actual  premium  received,"  such  deferred  dividends  may 
be  included  in  the  amounts  to  be  omitted  from  gross  income 
for  the  year  in  which  they  were  actually  paid  back,  credited 
to  the  policyholder,  or  applied  as  an  abatement  of  premium. 
In  the  case  of  dividends  credited  or  apportioned  annually 
to  the  policyholder,  only  the  aggregate  amount  so  actually 
credited  or  apportioned  during  the  premium-paying  period, 
and  not  any  accretions  thereto,  can  be  excluded  from  gross 
income.  In  the  case  of  whole-life  or  five-year  distribution 
policies,  deferred  dividends  may  be  excluded  from  gross  in- 
come to  the  extent  that  they  are  paid  back,  or  credited  to  the 
insured,  or  used  as  an  abatement  of  his  annual  premiums. 

Gross  Income  of  Insurance   Companies,   to  Include   What. 

Art.  101.  Gross  income  of  insurance  companies,  as  de- 
fined above,  will  include  net  premium  income  as  reported  to 
the  State  insurance  departments,  except  the  foregoing  items 
specifically  exempted  in  the  act,  and,  in  the  case  of  life  in- 
surance companies,  surrender  values  applied  in  any  manner, 
consideration  for  supplementary  contracts  involving  and  not 
involving  life  contingencies,  and  all  other  income,  gains,  or 
profit  as  shown  by  the  books  of  account. 

Consideration  for  Supplementary   Contracts. 

Art.  102.  Applied  surrender  values  and  consideration  for 
supplementary  contracts  not  involving  life  contingencies  in- 
cluded in  income  will,  of  course,  be  deducted  as  payments 
under  policy  contracts,  but  for  convenience  in  verifying  the 
returns  these  items  should  appear  in  the  return  in  both  gross 
income  and  deductions. 
9 


130  Federal  Income  Tax 

Supplementary  Statement  to  Accompany  Returns. 

Art.  103.  All  insurance  companies  should  include  and 
attach  to  their  returns  a  supplementary  statement  showing, 
for  life  companies,  the  aggregate  of  items  "of  such  portion 
of  any  actual  premium  received  from  any  individual  policy- 
holder as  shall  have  heen  paid  back  or  credited  to  such  in- 
dividual policyholder,  or  treated  as  an  abatement  of  pre- 
mium of  such  individual  policyholder  within  such  year";  in 
the  case  of  mutual  fire  insurance  companies  a  statement  show- 
ing "any  portion  of  the  premium  deposits  returned  to  their 
policyholders" ;  and  in  the  case  of  mutual  marine  companies 
"amounts  repaid  to  policyholders  on  account  of  premiums 
previously  paid  by  them,  and  interest  paid  upon  such  amounts 
between  the  ascertainment  thereof  and  the  payment  thereof," 
which  are,  or  may  be,  omitted  from  gross  income.  (For 
authorized  deductions,  on  account  of  losses,  etc.,  see  Arts. 
113  and  147.) 

Gross  Income  of  Manufacturing  Companies. 

Art.  104.  Gross  income  of  manufacturing  companies  shall 
consist  of  the  total  sales  of  manufactured  goods  during  the 
year  covered  by  the  return,  increased  or  decreased  by  the 
gain  or  loss  as  shown  by  the  inventories  of  finished  and  un- 
finished products,  raw  material,  etc.,  at  the  beginning  and 
end  of  the  year.  To  this  amount  should  be  added  the  income, 
gains,  or  profits  from  all  other  sources  as  shown  by  the  books 
of  account. 

Gross  Income  of  Mercantile  Corporations. 

Art.  105.  Gross  income  of  mercantile  companies  shall  in- 
clude the  total  merchandise  sales  during  the  year,  increased 
or  decreased  by  the  gain  or  loss  as  shown  by  the  inventories 
of  merchandise  at  the  beginning  and  end  of  the  year  for 
which  the  return  is  made;  to  this  amount  should  be  added 
the  income,  gains,  or  profits  derived  from  all  other  sources 
as  shown  by  the  books  of  account. 


Income  Tax  Keguxations  131 

Gross  Income  of  Miscellaneous  Companies. 

Art.  106.  Gross  income  of  miscellaneous  corporations  con- 
sists of  the  total  revenue  derived  from  the  operation  and 
management  of  the  business  and  property  of  the  corporation 
making  the  return,  together  with  all  amounts  of  income,  in- 
cluding the  income,  gains,  or  profits  from  all  other  sources 
as  shown  by  the  books  of  account. 

Definition  of  Gross  Income. 

Art.  107.  It  will  be  noted  from  these  definitions  that  the 
gross  income  embraces  not  only  the  operating  revenues,  but 
also  income,  gains,  or  profits  from  all  other  sources,  such  as 
rentals,  royalties,  interest,  and  dividends  from  stock  owned 
in  other  corporations,  and  appreciation  in  values  of  assets, 
if  taken  up  on  the  books  of  account  as  gain ;  also  profits  made 
from  the  sale  of  assets,  investments,  etc. 

Income  Derived  from  Sale  of  Capital  Assets. 

Art.  108.  For  the  purpose  of  determining  the  income  re- 
sulting from  the  sale  of  capital  assets  and  the  amount  to  be 
accounted  for  as  income  under  this  act,  there  shall  be  in- 
cluded any  and  all  profit  resulting  from  such  sale  and  which 
may  be  apportioned  to  the  period  during  which  the  Corpora- 
tion Tax  Law  (sec.  38,  act  of  August  5,  1909)  was  in  force 
and  effect,  which  was  not  returned  as  income  during  that 
period. 

Ascertaining  Net  Income  from  the  Sale  of  Capital  Assets. 

Art.  109.  In  ascertaining  net  income  derived  from  the 
sale  of  capital  assets,  if  such  assets  were  acquired  subsequent 
to  January  1,  1909,  the  difference  between  the  selling  price 
and  the  buying  price  shall  constitute  an  item  to  be  added  to 
or  subtracted  from  gross  income  according  to  whether  the 
selling  price  was  greater  or  less  than  the  buying  price.  If 
the  capital  assets  were  acquired  prior  to  January  1,  1909, 
the  amount  of  profit  or  loss  representing  the  difference  be- 
tween the  selling  and  buying  price  is  to  be  prorated  to  de- 


132  Federal  Income  Tax 

termine  the  proportion  of  the  gain  or  loss  arising  subsequent 
to  January  1,  1909,  and  the  proportionate  part  belonging 
to  the  years  subsequent  to  January  1,  1909,  shall  be  added 
to  or  deducted  from  the  gross  income  for  the  year  in  which 
the  sale  was  made. 

Profit  or  Loss  Arising  from  the  Sale  of  Such  Assets. 

Art.  110.  For  the  purpose  of  determining  the  profit  or 
loss  arising  from  the  sale  of  such  assets,  there  shall  be  added 
to  the  price  actually  realized  from  the  sale  any  amount  which 
has  heretofore  been  set  aside  and  deducted  from  gross  income 
by  way  of  depreciation  since  January  1,  1909,  which  has 
not  been  paid  out  in  making  good  such  depreciation  on  the 
property  sold.     (Amended  T.  D.  2077.) 

Changes  in  Book  Value  of  Assets. 

Akt.  111.  In  the  case  of  changes  in  book  values  of  capital 
assets  resulting  from  a  reappraisal  of  property,  the  conse- 
quent gains  or  losses  shall  be  computed  for  the  return  in  the 
manner  prescribed  above  in  the  case  of  the  sale  of  capital 
assets. 

Result  of  Annual  Adjustment  of   Values  to   be  Shown  in 

Return. 

In  cases  wherein  there  is  an  annual  adjustment  of  book 
values  of  securities,  real  estate  and  like  assets,  and  the  in- 
creases and  decreases  in  values,  thus  indicated,  are  taken  up 
on  the  books  and  reflected  in  the  profit  and  loss  account,  such 
readjusted  values  will  be  taken  into  account  in  making  the 
return  of  annual  net  income,  and  no  prorating  will  be  re- 
quired. If  such  adjustment  had  been  made  annually  prior 
to  March  1,  1913,  the  book  value  of  the  assets  at  that  date 
will  be  taken  as  the  basis  for  determining  gain  or  loss  re- 
sulting from  subsequent  sale,  maturity,  or  adjustment.  The 
adjustment  referred  to  will  comprehend  assets  which  have 
increased  in  value  as  well  as  those  which  have  decreased. 


Income  Tax  Regulations  133 

Where  Corporations  Are  Engaged  in  More  Than  One  Class 

of  Business. 

Akt.  112.  Where  a  corporation  is  engaged  in  carrying  on 
more  than  one  class  of  business,  gross  income  derived  from 
the  different  classes  of  business  shall  be  ascertained  accord- 
ing to  the  definitions  above,  and  which  are  applicable  thereto. 

Net  Income,  How  Ascertained. 

Art.  113.  The  net  income  shall  be  ascertained  by  deduct- 
ing from  the  gross  amount  of  the  income  of  such  corporation 
received  within  the  year  from  all  sources : 

Ordinary  and  Necessary  Expenses. 

First.  All  the  ordinary  and  necessary  expenses  paid 
within  the  year  in  the  maintenance  and  operation  of  its  busi- 
ness and  properties,  including  rentals  or  other  payments 
required  to  be  made  as  a  condition  to  the  continued  use  or 
possession  of  property. 

Loss  Sustained  Within  the  Year.     Depreciation. 

Second.  All  losses  actually  sustained  within  the  year  and 
not  compensated  by  insurance  or  otherwise,  including  a  rea- 
sonable allowance  for  depreciation  by  use,  wear  and  tear  of 
property,  if  any,  and  in  the  case  of  mines,  a  reasonable  allow- 
ance for  depletion  of  ores  and  all  natural  deposits,  not  to 
exceed  5  per  centum  of  the  gross  value  at  the  mine  of  the 
output  for  the  year  for  which  the  computation  is  made ;  and 
in  the  case  of  insurance  companies,  the  net  addition,  if  any, 
required  by  law  to  be  made  within  the  year  to  reserve  funds, 
and  the  sums  other  than  dividends  paid  within  the  year  on 
policy  and  annuity  contracts,  except  as  provided  in  the  cases 
of  mutual  fire,  mutual  marine,  and  life  insurance  companies. 

Interest  Accrued  and  Paid  Within  the  Year. 

Third.  The  amount  of  interest  accrued  and  paid  within 
the  year  on  its  indebtedness  to  an  amount  of  such  indebted- 
ness not  exceeding  one-half  of  the  sum  of  its  interest-bearing 


134  Federal  Income  Tax 

indebtedness  and  its  paid-up  capital  stock  outstanding  at  the 
close  of  the  year,  or  if  no  capital  stock,  on  the  amount  of  its 
indebtedness  not  exceeding  the  amount  of  capital  employed 
in  the  business  at  the  close  of  the  year. 

Interest  on  Indebtedness  Secured  by  Collateral. 

Provided,  That  in  case  of  indebtedness  wholly  secured  by 
collateral  the  subject  of  sale  in  ordinary  business  of  such 
corporation,  joint-stock  company,  or  association,  the  total 
interest  secured  and  paid  by  such  company,  corporation,  or 
association  within  the  year  on  any  such  indebtedness  may 
be  deducted  as  a  part  of  its  expense  of  doing  business. 

Tax  Paid  on  Guaranteed  Bonds  Not  Deductible. 

Provided  further,  That  in  the  case  of  bonds  or  other  in- 
debtedness, which  have  been  issued  with  a  guaranty  that  the 
interest  payable  thereon  shall  be  free  from  taxation,  no  de- 
duction for  the  payment  of  the  tax  herein  imposed  shall  be 
allowed ;  and  in  the  case  of  a  bank,  banking  association,  loan 
or  trust  company,  interest  paid  within  the  year  on  deposits 
or  on  moneys  received  for  investment  and  secured  by  in- 
terest-bearing certificates  of  indebtedness  issued  by  such  bank, 
banking  association,  loan  or  trust  company. 

Taxes  Paid  Within  the  Year. 

Fourth.  All  sums  paid  within  the  year  for  taxes  imposed 
under  the  authority  of  the  United  States,  or  any  State  or 
Territory  thereof,  or  imposed  by  the  government  of  any 
foreign  country. 

General  Expenses. 

Art.  114.  Expenses  of  operation  and  maintenance  shall 
include  all  expenditures  for  material,  labor,  fuel,  and  other 
items  entering  into  the  cost  of  the  goods  sold  or  inventoried 
at  the  end  of  the  year,  and  all  other  expenses  incurred  in 
the  operation  of  the  business  except  such  as  are  required  by 
the  act  to  be  segregated  in  the  return. 


Income  Tax  Regulations  135 

Cost  of  Buildings  on  Leased  Grounds. 
Art.  115.  The  cost  of  erecting  permanent  buildings  on 
ground  leased  by  a  company  is  a  proper  deduction  as  a  rental 
charge,  provided  such  buildings  are  left  on  the  ground  at 
the  expiration  of  the  lease  as  a  part  of  the  rental  payment. 
In  such  case  the  cost  will  be  prorated  according  to  the  num- 
ber of  years  constituting  the  term  of  the  lease  and  the  annual 
deduction  will  be  made  accordingly. 

Expense,  Foreign  Steamship  Companies. 

Art.  116.  General  expenses,  such  as  coal,  ship  stores,  etc., 
of  foreign  steamship  companies,  shall  be  prorated  as  pro- 
vided in  the  act  for  interest  deductions  in  the  case  of  foreign 
corporations. 

Commissions  to  Salesmen  Paid  in  Stock. 

Art.  117.  Commissions  allowed  salesmen,  paid  in  stock, 
may  be  deducted  as  expense  if  so  charged  on  books  at  the 
actual  value  of  such  stock. 

Additions  and  Betterments. 

Art.  118.  Amounts  expended  in  additions  and  betterments 
which  constitute  an  increase  in  capital  investment  are  not  a 
proper  deduction. 

Compensation  Based  on  Stockholding  Not  Deductible. 

Art.  119.  Amounts  paid  as  compensation  or  additional 
compensation  to  officers  or  employees,  which  amounts  are 
based  upon  the  stockholdings  of  such  officers  or  employees, 
are  held  to  be  dividends,  and  although  paid  in  lieu  of  salaries 
or  wages,  are  not  allowable  deductions  from  gross  income, 
for  the  reason  that  dividends  are  not  deductible. 

Gifts,  Pensions,  or  Gratuities  Not  Deductible. 

Art.  120.  Amounts  paid  for  pensions  to  retired  employ- 
ees, or  to  their  families,  or  others  dependent  upon  them,  or 
on  account  of  injuries  received  by  employees,  are  proper 
deductions  as  "ordinary  and  necessary  expenses" ;  gifts  or 


136  Federal  Income  Tax 

gratuities  to  employees  in  the  service  of  a  corporation  are 
not  properly  deductible  in  ascertaining  net  income. 

Donations  Which  Are  Deductible. 
Aet.  121.  Donations  made  for  purposes  connected  with 
the  operation  of  the  property  when  limited  to  charitable  in- 
stitutions, hospitals,  or  educational  institutions,  conducted 
for  the  benefit  of  its  employees,  or  their  dependents,  shall 
be  a  proper  deduction  for  ordinary  and  necessary  expenses. 

Reserves  for  Insurance. 
Art.  122.  Funds  set  aside  by  a  corporation  for  insuring 
its  own  property  are  not  a  proper  deduction,  but  any  loss 
actually  sustained  and  charged  to  such  fund  may  be  deducted. 

Materials  and  Supplies. 
Art.  123.  In  ascertaining  expenses  proper  to  be  included 
in  the  deductions  to  be  made  under  the  item  of  "Expenses," 
corporations  carrying  materials  and  supplies  on  hand  for 
use  should  include  in  such  expenses  the  charges  for  materials 
and  supplies  only  to  the  amount  that  the  same  are  actually 
disbursed  and  used  in  operation  and  maintenance  during  the 
year  for  which  the  return  is  made. 

Losses  Sustained  During  the  Year. 

Art.  124.  The  deduction  for  losses  must  be  losses  actu- 
ally sustained  during  the  year  and  not  compensated  by  in- 
surance or  otherwise.  It  must  be  based  upon  the  difference 
between  the  cost  value  and  salvage  value  of  property  or  assets, 
including  in  the  latter  value  such  amount,  if  any,  as  has,  in 
the  current  or  previous  years,  been  set  aside  and  deducted 
from  gross  income  by  way  of  depreciation,  as  elsewhere  de- 
fined, and  has  not  been  paid  out  in  making  good  such  depre- 
ciation. 

Bad  Debts  Charged  Off. 

Art.  125.  Bad  debts,  if  so  charged  off  the  company's 
books,  during  the  year,  are  proper  deductions.  But  such 
debts,  if  subsequently  collected,  must  be  treated  as  income. 


Income  Tax  Regulations  137 

Reserves  Not  Deductible. 
Art.  126.  Reserves  to  take  care  of  anticipated  or  probable 
losses  are  not  a  proper  deduction  from  gross  income. 

Loss  Due  to  Removal  of  Buildings. 

Art.  127.  Loss  due  to  voluntary  removal  of  buildings,  etc., 
incident  to  improvements  is  either  a  proper  charge  to  the 
cost  of  new  additions  or  to  depreciation  already  provided, 
as  the  facts  may  indicate,  but  in  no  case  is  it  a  proper  de- 
duction in  determining  net  income,  except  as  it  may  be  re- 
flected in  the  reasonable  amount  allowable  as  a  deduction 
for  depreciation  of  the  new  building.  Any  loss  claimed  be- 
cause of  the  voluntary  removal  of  a  building  is  presumed  to 
have  been  covered  by  previous  depreciation  charges ;  other- 
wise the  amount  of  such  loss  will  constitute  a  part  of  the 
cost  of  the  new  building. 

Losses  from  Sale  of  Capital  Assets. 

Art.  128.  All  losses  claimed  arising  from  sale  of  capital 
assets  should  be  arrived  at  in  the  manner  prescribed  in 
Article  109,  defining  gains  arising  from  sale  of  capital  assets. 

Depreciation  Defined.     Depreciation,  How  Determined. 

Art.  129.  The  deduction  for  depreciation  should  be  the 
estimated  amount  of  the  loss,  accrued  during  the  year  to 
which  the  return  relates,  in  the  value  of  the  property  in  re- 
spect of  which  such  deduction  is  claimed,  that  arises  from 
exhaustion,  wear  and  tear,  or  obsolescence  out  of  the  uses 
to  which  the  property  is  put,  and  which  loss  has  not  been 
made  good  by  payments  for  ordinary  maintenance  and  re- 
pairs deducted  under  the  heading  of  expenses  of  mainte- 
nance and  operation.  This  estimate  should  be  formed  upon 
the  assumed  life  of  the  property,  its  cost,  and  its  use.  Ex- 
penses paid  in  any  one  year  in  making  good  exhaustion,  wear 
and  tear,  or  obsolescence  in  respect  of  which  any  deduction 
for  depreciation  is  claimed  must  not  be  included  in  the  de- 
duction for  expense  of  maintenance  and  operation  of  the 


138  Federal  Income  Tax 

property,  but  must  be  made  out  of  accumulated  allowances, 
deducted  for  depreciation  in  current  and  previous  years. 

Depreciation  Deductible,  How  Treated. 

Art.  130.  The  depreciation  allowance,  to  be  deductible, 
must  be,  as  nearly  as  possible,  the  measure  of  the  loss  duo 
to  wear  and  tear,  exhaustion,  and  obsolescence,  and  should 
be  so  entered  on  the  books  as  to  constitute  a  liability  against 
the  assets  of  the  company,  and  must  be  reflected  in  the  an- 
nual balance  sheet  of  the  company.  The  annual  allowance 
deductible  on  this  account  should  be  such  an  amount  as  that 
the  aggregate  of  the  annual  allowances  deducted  during  the 
life  of  the  property  with  respect  to  which  it  is  claimed  will 
not,  when  the  property  is  worn  out,  exhausted,  or  obsolete, 
exceed  its  original  cost. 

Incidental  Repairs. 

Art.  131.  Incidental  repairs  which  neither  add  to  the 
value  of  the  property  nor  appreciably  prolong  its  life,  but 
keep  it  in  an  operating  condition,  may  be  deducted  as  ex- 
penses. 

Depreciation  Reserve. 

Art.  132.  Depreciation  set  up  on  the  books  and  deducted 
from  gross  income  cannot  be  used  for  any  purpose  other  than 
making  good  the  loss  sustained  by  reason  of  the  wear  and 
tear,  exhaustion,  or  obsolescence  of  the  property  with  respect 
to  which  it  was  claimed.  If  it  develops  that  an  amount  has 
been  reserved  or  deducted  in  excess  of  the  loss  by  deprecia- 
tion, the  excess  shall  be  restored  to  income  and  so  accounted 
for. 

Diversion  of  Depreciation  Reserve. 

Art.  133.  If  any  portion  of  the  depreciation  set  up  is 
diverted  to  any  purpose  other  than  making  good  the  loss  sus- 
tained by  reason  of  depreciation,  the  income  account  for  the 
year  in  which  such  diversion  takes  place  must  be  correspond- 
ingly increased. 


Income  Tax  Regulations  139 

Shrinkage  in  Booh  Values. 

Art.  134.  Depreciation  in  book  values  of  capital  assets 
shall  be  treated  in  the  return  in  the  manner  prescribed  in  the 
case  of  loss  from  the  sale  of  capital  assets  (Art.  109),  but 
amounts  arbitrarily  charged  off  will  not  be  allowed  as  deduce 
tions  except  so  far  as  they  represent  an  actual  shrinkage  in 
values  which  may  be  determined  to  have  taken  place  during 
the  year  for  which  the  return  is  made. 

Amortization  of  Bonds.     Loss  to  Be  Prorated. 

Aet.  135.  Where  a  corporation  holds  bonds  which  were 
purchased  at  a  rate  above  par  and  said  corporation  shall  pro- 
portionately reduce  the  value  of  those  bonds  on  its  books 
each  year  so  that  the  book  value  shall  be  the  redemption  value 
of  the  bonds  when  such  bonds  become  due  and  payable,  the 
return  of  annual  net  income  of  the  corporation  holding  such 
bonds  may  show  the  depreciation  on  account  of  amortization 
of  such  bonds.  The  requirement  is,  however,  that  the  amount 
carried  to  the  amortization  account  each  year  shall  be  equi- 
tably proportioned  with  respect  to  the  difference  between  the 
purchase  price  and  the  maturing  value  and  the  number  of 
years  to  elapse  until  the  bonds  become  due  and  payable.  With 
respect  to  bond  issues  where  such  bonds  are  disposed  of  for 
a  price  less  than  par  and  are  redeemable  at  par,  it  is  also 
held  that  because  of  the  fact  that  such  bonds  must  be  re- 
deemed at  their  face  value,  the  loss  sustained  by  reason  of 
their  sale  for  less  than  their  face  value  may  be  prorated  by 
the  issuing  corporation  in  accordance  with  the  life  of  the 
bond.     (Amended  2005,  2130,  2161.) 

Good  Will. 

Aet.  136.  "Good  will"  represents  the  value  attached  to  a 
business  over  and  above  the  value  of  the  physical  property, 
and  is  such  an  entirely  intangible  asset  that  no  claim  for 
depreciation  in  connection  therewith  can  be  allowed. 

Aet.  137.  An  allowance  for  depreciation  of  patents  will 
be  made  on  the  following  basis : 


140  Federal  Income  Tax 

Depreciation  on  Patents.     How  Determined. 

The  deduction  claimed  for  exhaustion  of  the  capital  assets 
as  represented  by  patents  to  be  made  in  the  return  of  annual 
net  income  of  a  corporation  for  any  given  year  shall  be  one- 
seventeenth  of  the  actual  cost  of  such  patents  reduced  to  a 
cash  basis.  Where  the  patent  has  been  secured  from  the 
Government  by  a  corporation  itself,  its  cost  would  be  repre- 
sented by  the  various  Government  fees,  cost  of  drawings,  ex- 
perimental models,  attorneys'  fees,  etc.  Where  the  patent 
has  been  purchased  by  the  corporation  for  a  cash  considera- 
tion, the  amount  would  represent  the  cost.  Where  the  cor- 
poration has  purchased  a  patent  and  made  payment  therefor 
in  stocks  or  other  securities,  the  actual  cash  value  of  such 
stocks  or  other  securities  at  the  time  of  the  purchase  will 
represent  the  cost  of  the  patent  to  the  corporation. 

Deduction  in  Case  of  Obsolescence  of  Patents. 

Art.  138.  With  respect  to  the  depreciation  of  patents,  one- 
seventeenth  of  the  cost  is  allowable  as  a  proper  deduction 
each  year  until  the  cost  of  the  patent  has  been  returned  to  the 
corporation.  Where  the  value  of  a  patent  has  disappeared 
through  obsolescence  or  any  other  cause  and  the  fact  has  been 
established  that  the  patent  is  valueless,  the  unreturned  cash 
investment  remaining  in  the  patent  may  be  claimed  as  a 
total  loss  and  be  deducted  from  gross  income  in  the  return 
of  annual  net  income  for  the  year  during  which  the  facts  as 
to  obsolescence  or  loss  shall  be  established,  such  unreturned 
cash  value  to  be  fixed  in  accordance  with  the  proportion  that 
the  number  of  years  which  the  patent  still  has  to  run  bears 
to  the  full  patent  period  of  17  years. 

Depi-eciation  of  Timber  Land. 

Art.  139.  Corporations  owning  tracts  of  timber  lands  and 
removing  therefrom  and  selling  or  otherwise  disposing  of 
the  timber  will  be  permitted  to  deduct  from  their  gross  in- 
come on  account  of  depreciation  or  depletion  an  amount  rep- 
resenting the  original  cost  of  such  timber,  plus  any  carrying 


Income  Tax  Regulations  141 

charges  that  may  have  been  capitalized  or  not  deducted  from 
income.  The  purpose  of  the  depreciation  or  depletion  deduc- 
tion is  to  secure  to  the  corporation,  when  the  timber  has  been 
exhausted,  an  aggregate  amount  which,  plus  the  salvage  value 
of  the  land,  will  equal  the  capital  actually  invested  in  such 
timber  and  land. 

Deductions  to  Cease,  When. 

Aet.  140.  When  an  amount  sufficient  to  return  this  capi- 
tal has  been  secured  through  annual  depreciation  deductions 
no  further  deduction  on  this  account  shall  be  allowed.  For 
the  purpose  of  increasing  the  deduction  on  this  account  no 
arbitrary  increase  in  values  shall  be  made,  unless  such  in- 
crease in  value  shall  be  returned  as  income  for  the  year  in 
which  the  increase  in  value  was  taken  up  on  the  books. 

Depreciation  of  Natural  Deposits. 

Aet.  141.  The  depreciation  of  coal,  iron,  oil,  gas,  and  all 
other  natural  deposits  must  be  based  upon  the  actual  cost 
of  the  properties  containing  such  deposits.  In  no  case  shall 
the  annual  deduction  on  this  account  exceed  5  per  cent  of 
the  gross  value  at  the  mine  (well,  etc.)  of  the  output  for  the 
year  for  which  the  computation  is  made. 

Definition  of  "Gross  Value"  at  the  Mine. 

Aet.  142.  The  term  "gross  value  at  the  mine,"  as  used  in 
paragraphs  B  and  G  of  section  2  of  the  act  of  October  3, 
1913,  prescribing  a  limit  to  the  amount  which  may  be  de- 
ducted in  the  return  of  individuals  and  corporations  as  de- 
preciation in  the  case  of  mines,  is  held  to  mean  the  market 
value  of  ore,  coal,  crude  oil,  and  gas  at  the  mine  or  well, 
where  such  value  is  established  by  actual  sales  at  the  mine  or 
well ;  and  in  case  the  market  value  of  the  product  of  the  mine 
or  well  is  established  at  some  place  other  than  at  the  mine 
or  well,  or  on  the  basis  of  the  bullion  or  metallic  value  of  the 
ore,  then  the  gross  value  at  the  mine  is  held  to  be  the  value 
of  the  ore,  coal,  oil,  or  gas  sold,  or  of  the  metal  produced, 
less  transportation,  reduction,  and  smelting  charges. 


142  Federal  Income  Tax 

Rate  of  Deduction  to  Be  Reduced,  When. 

If  the  rate  of  5  per  cent  per  annum  shall  return  to  the  cor- 
poration its  capital  investment  prior  to  the  exhaustion  of  the 
deposits,  the  rate  on  which  the  annual  deduction  for  deple- 
tion of  deposits  is  based  must  be  lowered  in  accordance  with 
the  estimated  number  of  years  it  will  take  to  exhaust  the 
estimated  reserves. 

Deduction  to  Cease,  When. 

In  case  the  reserves  shall  be  in  excess  of  the  estimates,  no 
further  deduction  on  account  of  depletion  shall  be  made  where 
the  capital  investment  has  been  returned  to  the  corporation. 

Depreciation  of  Plant,  etc. 

Art.  143.  In  addition  to  the  deduction  to  measure  the  loss 
due  to  depletion,  the  corporation  will  be  allowed  the  usual 
depreciation  of  its  machinery,  equipment,  etc.,  such  depre- 
ciation to  be  determined  on  the  basis  of  the  cost  and  esti- 
mated life  of  the  property  with  respect  to  which  the  depre- 
ciation is  claimed. 

Corporatioixs  Leasing  Oil  or  Gas. 

Aet.  144.  Corporations  leasing  oil  or  gas  territory  shall 
base  their  depletion  deduction  upon  the  cost  of  the  lease,  and 
not  upon  the  estimated  value,  in  place,  of  the  oil  or  gas. 

Corporations  Operating  Mines. 
Aet.  145.  Corporations  operating  mines  (including  oil  or 
gas  wells)  upon  a  royalty  basis  only  cannot  claim  deprecia- 
tion because  of  the  exhaustion  of  the  deposits. 

Unearned  Increment. 
Aet.  146.  Unearned  increment  will  not  be  considered  in 
fixing  the  value  on  which  depreciation  shall  be  based. 

Deduction   of   Losses,   Depreciation,    Payments    on    Policy 
Contracts  by  Insurance  Companies. 
Aet.  147.   (a)   Under  item  5  (a)  of  the  return  form,  the 
insurance  company  may  take  credit  for  all  losses  actually 


Income  Tax  Regulations  143 

sustained  during  the  year  and  not  compensated  by  insurance 
or  otherwise,  including  losses  resulting  from  the  sale  or  ma- 
turity of  securities  or  other  assets,  as  well  as  decreases  by 
adjustment  of  book  values  of  securities,  in  so  far  as  such  de- 
creases represent  actual  declines  in  values  which  have  taken 
place  during  the  year  for  which  the  return  is  made;  also 
losses  from  agency  balances,  or  other  accounts,  charged  off  as 
worthless ;  losses  by  defalcation ;  premium  notes  voided  by 
lapse,  when  such  notes  shall  have  been  included  in  gross  in- 
come. This  item  will  not,  however,  include  payments  on 
policy  contracts. 

Losses  by  Shrinkage  in  Value  of  Property. 

(b)  In  this  item  may  be  deducted  actual  losses  sustained 
within  the  year  by  reason  of  the  depreciation  of  property, 
which  shall  have  been  so  entered  on  the  books  of  the  com- 
pany as  to  constitute  a  liability  against  its  assets.  An  arbi- 
trary depreciation  deduction  claimed  in  the  return,  but  not 
evidenced  by  book  entry,  cannot  be  allowed. 

Policy  Contracts  Paid.     Losses  Incurred  and  Unpaid  Not 

Deductible. 

(c)  In  this  item  credit  will  be  taken  for  all  death,  dis- 
ability, or  other  policy  claims,  including  fire,  accident,  and 
liability  losses,  matured  endowments,  annuities,  payments  on 
installment  policies,  surrender  values,  and  all  claims  actually 
paid  under  the  terms  of  policy  contracts.  Salvage  need  not 
be  included  in  gross  income  if  deducted  in  ascertaining  the 
net  amount  paid  for  losses  under  policy  contracts.  Reserves 
covering  liabilities  for  losses  incurred,  reported,  resisted,  ad- 
justed or  unadjusted  but  not  paid,  cannot  be  deducted  from 
gross  income  under  this  or  any  other  item  of  the  return. 

Additions  to  Reserves  Required  by  Law,  How  Determined. 

(d)  The  reserve  funds  of  insurance  companies  to  be  con- 
sidered in  computing  the  deductible  net  addition  to  reserve 
funds  are  held  to  include  only  the  reinsurance  reserve  and 


144  Federal  Income  Tax 

the  reserve  for  supplementary  contracts  required  by  law  in 
the  case  of  life  insurance  companies,  the  unearned  premium 
reserves  required  by  law  in  the  case  of  fire,  marine,  accident, 
liability,  and  other  insurance  companies,  and  only  such  other 
reserves  as  are  specifically  required  by  the  statutes  of  a  State 
within  which  the  company  making  the  return  is  doing  busi- 
ness. The  reserves  used  in  computing  the  net  addition  must 
not  include  the  reserve  on  any  policies  the  premiums  on 
which  have  not  been  accounted  for  in  gross  income.  For  the 
purpose  of  this  deduction,  the  net  addition  is  the  excess  of 
the  reserve  at  the  end  of  the  year  over  that  at  the  beginning 
of  the  year  and  may  be  based  upon  the  highest  authorized 
reserve  required  by  any  State  in  which  the  company  making 
the  return  does  business. 

Assessment  Company  Reserves. 

In  the  case  of  assessment  insurance  companies,  the  actual 
deposits  of  sums  with  the  State  or  Territorial  officers  pursu- 
ant to  law,  as  additions  to  guaranty  or  reserve  funds,  shall 
be  treated  as  payments  required  by  law  to  reserve  funds. 

Mutual  marine  insurance  companies  will  deduct  under 
item  5(e)  amounts  repaid  to  policyholders  on  account  of  pre- 
miums previously  paid  by  them  and  interest  paid  upon  such 
amounts  between  the  ascertainment  thereof  and  the  payment 
thereof. 

What  Constitutes  Allowable  Interest  Deduction. 
Art.  148.  The  amount  of  interest  accrued  and  paid  within 
the  year  by  a  corporation  on  an  amount  of  bonded  or  other 
indebtedness  not  in  excess  of  one-half  of  the  sum  of  the  in- 
terest-bearing indebtedness  and  the  paid-up  capital  stock  out- 
standing at  the  close  of  the  year,  or,  if  no  capital  stock,  on 
the  amount  of  interest-bearing  indebtedness  not  exceeding 
the  amount  of  capital  employed  in  the  business  at  the  close 
of  the  year,  constitutes  an  allowable  deduction ;  that  is,  the 
maximum  principal,  upon  which  interest  for  the  purpose  of 
this  deduction  can  be  computed,  must  not  exceed,  in  the  one 
case,  one-half  of  the  sum  of  the  interest-bearing  indebtedness 


Income  Tax  Regulations  145 

and  the  capital  stock  outstanding  at  the  close  of  the  year, 
or,  in  the  other  case,  must  not  exceed  the  amount  of  capital 
employed  in  the  business  at  the  close  of  the  year.  The  in- 
terest to  be  deductible  must  have  been  computed  on  the  proper 
principal  at  the  contract  rate  and  must  have  been  actually 
paid  within  the  year. 

Interest  Paid  as  Rental  Deductible.  Interest  on  Mortgage 
on  Real  Estate  in  Which  Corporation  Has  Equity  Not 
Deductible. 

Interest  paid  pursuant  to  contract  on  an  indebtedness  se- 
cured by  mortgage  on  real  estate  occupied  and  used  by  a  cor- 
poration, in  which  real  estate  the  corporation  has  no  equity  or 
to  which  it  is  not  taking  title  is  an  allowable  deduction  from 
gross  income  as  a  rental  charge,  payment  of  which  is  required 
to  be  made  as  a  condition  to  the  continued  use  and  possession 
of  the  property.  If,  however,  the  corporation  has  an  equity 
in  or  is  purchasing  for  its  own  use  the  real  estate  upon  which 
such  mortgage  is  a  prior  lien,  the  indebtedness  will  be  held 
to  be  indebtedness  of  the  corporation  within  the  meaning  of 
the  law,  and  the  interest  paid  on  such  mortgage  will  be  de- 
ductible only  to  the  extent  that  it,  with  interest  on  other 
obligations  of  the  corporation,  is  within  the  limit  fixed  by  the 
act. 

Banks  and  Banking  Associations. 

Art.  149.  In  the  case  of  banks  and  banking  associations, 
loan  or  trust  companies,  interest  paid  within  the  year  on 
deposits,  or  on  moneys  received  for  investment  and  secured 
by  interest-bearing  certificates  of  indebtedness  issued  by  such 
bank,  banking  association,  loan  or  trust  company,  may  be 
allowably  deducted  from  the  gross  income  of  such  corpora- 
tions. 

Interest  Paid  on  Indebtedness. 

Art.  150.  Interest  paid  on  indebtedness,  wholly  secured 
by  collateral  the  subject  of  sale  in  ordinary  business  of  such 
corporations,  is  also  deductible  to  the  full  amount  of  such 
10 


146  Federal  Income  Tax 

interest  paid.  This  contemplates  that  the  entire  interest  re- 
ceived on  the  collateral  securing  such  indebtedness  shall  be 
included  in  the  gross  income  returned. 

Different  Rates  of  Interest. 

Art.  151.  Interest  on  bonded  or  other  indebtedness  bear- 
ing different  rates  of  interest  may  be  deducted  from  gross 
income  during  the  year,  provided  the  aggregate  amount  of 
such  indebtedness  on  which  the  interest  is  paid  does  not  ex- 
ceed the  limit  prescribed  by  law,  and  in  case  the  indebted- 
ness is  in  excess  of  the  amount  on  which  interest  may  be 
legally  deducted  the  indebtedness  bearing  the  highest  rate 
may  be  first  considered  in  computing  the  interest  deduction, 
and  the  balance,  if  any,  will  be  computed  upon  the  indebted- 
ness bearing  the  next  lower  rate  actually  paid,  and  so  on 
until  interest  on  the  maximum  principal  allowed  has  been 

^        '  Taxes  Deductible. 

Art.  152.  All  sums  paid  within  the  year  for  taxes  imposed 
under  the  authority  of  the  United  States  or  of  any  State  or 
Territory  thereof,  or  imposed  by  the  government  of  any 
foreign  country,  are  deductible  from  gross  income. 

Taxes  Not  Deductible. 

Art.  153.  Taxes  paid  for  local  benefits  are  not  deductible. 
Taxes  paid  by  a  corporation  pursuant  to  a  contract  guaran- 
teeing that  the  interest  payable  on  its  bonds  or  other  indebt- 
edness shall  be  free  from  taxation  are  not  deductible. 

Tax  on  Capital  Stock  of  Banks. 

Art.  154.  Banks  paying  taxes  assessed  against  their  stock- 
holders because  of  their  ownership  of  the  shares  of  stock  is- 
sued by  such  banks  cannot  deduct  the  amount  of  taxes  so 
paid  in  making  their  return  for  the  income  tax  imposed  by 
this  act  unless  specially  authorized  to  do  so  by  the  laws  of 
the  State  in  which  they  do  business.  The  shares  of  stock  are 
the  property  of  the  stockholders,  and  such  holders  are  pri- 
marily liable  for  the  tax. 


Income  Tax  Regulations  147 

Import  Duties. 

Art.  155.  Import  duties  or  taxes  are  not  deductible  under 
the  item  of  taxes  paid  during  the  year,  but  should  be  included 
in  arriving  at  the  cost  of  goods  under  item  No.  4  (expenses). 

Reserves  for  Taxes. 

Art.  156.  Reserves  for  taxes  cannot  be  allowed,  as  the  law 
specifically  provides  that  only  such  sums  as  are  paid  within 
the  year  for  taxes  shall  be  deducted. 

Foreign  Corporations  Subject  to  Tax.     Deductions  Confined 
to  Expenses  of  Business  Done  in  the  United  States. 

Aet.  157.  Foreign  corporations  shall  be  subject  to  the 
normal  tax  of  1  per  cent  computed  upon  the  net  income  re- 
ceived by  or  accruing  to  such  corporations  from  business 
transacted  and  capital  invested  in  this  country.  For  the 
purpose  of  the  tax  the  net  income  of  such  foreign  organiza- 
tions shall  be  ascertained  by  deducting  from  the  gross  income 
arising,  received,  or  accruing  from  business  done  and  capital 
invested  in  this  country  the  deductions  enumerated  in  the 
act,  which  deductions  shall  be  limited  to  expenditures  or 
charges  actually  incurred  in  the  maintenance  and  operation 
of  the  business  transacted  and  capital  invested  in  the  United 
States,  or,  as  to  certain  charges,  such  proportion  of  the  ag- 
gregate charges  as  the  gross  income  from  business  done  and 
capital  invested  in  the  United  States  bears  to  the  aggregate 
income  within  and  without  the  United  States.  In  other 
words,  the  deductions  from  the  gross  income  of  a  foreign  cor- 
poration doing  business  in  this  country  should,  as  nearly  as 
possible,  represent  the  actual  expenses  and  authorized  charges 
incident  to  the  business  done  and  capital  invested  in  this 
country,  and  must  not  comprehend,  either  directly  or  indi- 
rectly, any  expenditures  or  charges  incurred  in  the  transac- 
tion of  business  or  the  investment  of  capital  without  the 
United  States. 


148  Federal  Income  Tax 

How  Deductions  Shall  Be  Evidenced. 

Art.  158.  It  is  immaterial  whether  the  deductions  except 
for  taxes  and  losses  are  evidenced  by  actual  disbursements 
in  cash,  or  whether  evidenced  in  such  other  way  as  to  be 
properly  acknowledged  by  the  corporate  officers  and  so  en- 
tered on  the  books  of  the  corporation  as  to  constitute  a  lia- 
bility against  the  assets  of  the  corporation  making  the  return. 
Deductions  for  taxes,  however,  should  be  the  aggregate  of 
the  amounts  actually  paid,  as  shown  on  the  cash  book  of  the 
corporation.  Deductions  for  losses  should  be  confined  to 
losses  actually  sustained  and  charged  off  during  the  year 
and  not  compensated  by  insurance  or  otherwise.  Except  as 
the  same  may  be  modified  by  the  provisions  of  the  act,  limit- 
ing certain  deductions  and  authorizing  others,  the  net  income 
as  returned  for  the  purpose  of  the  tax  should  be  the  same 
as  that  shown  by  the  books  or  the  annual  balance  sheet. 

Tax  on  Net  Income  of  Corporations  for  the  Year  1918. 

Art.  159.  The  tax  imposed  upon  the  income  of  corpora- 
tions, whether  domestic  or  foreign,  shall  be  computed  upon 
the  net  income,  ascertained  in  the  manner  hereinbefore  indi- 
cated, except  that  for  the  year  ending  December  31,  1913,  the 
income  tax  will  be  imposed  upon  the  net  income  accrued  from 
March  1  to  December  31,  both  dates  inclusive,  and  such 
amount  of  net  income  is  ascertained  by  taking  five-sixths  of 
the  entire  net  income  for  said  calendar  year. 

Special  Excise  Tax  on  Corporations. 

Art.  160.  The  special  excise  tax  on  corporations  provided 
for  in  the  act  of  August  5,  1909,  is  reaffirmed  and  made 
operative  and  effective  as  to  the  period  from  January  1  to 
February  28,  1913,  both  dates  inclusive,  which  said  tax  shall 
be  computed  upon  one-sixth  of  the  entire  net  income  of  said 
corporations  for  said  year,  and  the  net  income  shall  be  ascer- 
tained in  accordance  with  the  provisions  of  the  income-tax 
law. 


Income  Tax  Regulations  149 

Return  and  Assessment. 

For  the  year  1913  it  shall  be  necessary  to  make  but  one 
return  and  assessment  for  all  taxes  imposed  in  the  income-tax 
law  upon  corporations,  either  by  way  of  income  or  excise, 
which  return  and  assessment  shall  be  made  at  the  times  and 
in  the  manner  provided  in  section  2  of  the  act  of  October  3, 
1913. 

No  Specific  Exemption  Alloivable  as  a  Deduction. 

Under  the  present  law,  no  specific  exemption  is  allowable, 
as  was  the  case  under  the  corporation-tax  law;  hence  the 
assessment  will  be  based  upon  the  entire  net  income  of  the 
corporation  arising  or  accruing  to  it  from  all  sources  during 
the  entire  year  for  which  the  return  is  made. 

Inventories. 
Aet.  161.  In  order  that  certain  classes  of  corporations  may 
arrive  at  their  correct  income,  it  is  necessary  that  an  inven- 
tory, or  its  equivalent,  of  materials,  supplies,  and  merchan- 
dise on  hand  for  use  or  sale  at  the  close  of  each  calendar  year 
shall  be  made  in  order  to  determine  the  gross  income  or  to 
determine  the  expense  of  operation. 

Physical  Inventory. 

A  physical  inventory  is  at  all  times  preferred,  but  where  a 
physical  inventory  is  impossible  and  an  equivalent  inventory 
is  equally  accurate,  the  latter  will  be  acceptable. 

An  equivalent  inventory  is  an  inventory  of  materials,  sup- 
plies, and  merchandise  on  hand  taken  from  the  books  of  the 

corporation. 

Corporations,  Classes  of. 

Art.  162.  For  the  purpose  of  this  tax,  corporations  are 
divided  into  five  classes,  as  follows: 

Class  A.  Financial  and  commercial,  including  banks, 
banking  associations,  trust  companies,  guaranty  and  surety 
companies,  title  insurance  companies,  building  associations 
(if  for  profit),  and  insurance  companies,  not  specifically 
exempt. 


150  Federal  Income  Tax 

Class  B.  Public  service,  such  as  railroad,  steamboat, 
ferryboat,  and  stage-line  companies;  street-railway  com- 
panies; pipe-line,  gas-light,  and  electric-light  companies;  ex- 
press companies,  telegraph  and  telephone  companies. 

Class  C.  Industrial  and  manufacturing,  such  as  mining, 
oil  and  gas  producing  companies,  lumber  and  coke  companies ; 
rolling  mills ;  foundry  and  machine  shops ;  sawmills ;  flour, 
woolen,  cotton,  and  other  mills;  manufacturers  of  cars,  auto- 
mobiles, elevators,  agricultural  implements,  etc. ;  manufac- 
turers or  refiners  of  sugar,  molasses,  sirups,  or  other  products ; 
ice  and  refrigerating  companies ;  slaughterhouse,  tannery, 
packing,  or  canning  companies;  printing  and  publishing 
companies,  etc. 

Class  D.  Mercantile,  including  all  dealers  (not  otherwise 
classed  as  producers  or  manufacturers)  in  coal,  lumber,  grain, 
produce,  and  all  goods,  wares,  and  merchandise. 

Class  E.  Miscellaneous,  such  as  architects,  contractors, 
hotel,  theater,  or  other  companies  or  associations  not  other- 
wise classified. 

Form  of  Return. 

Art.  163.  Under  the  authority  conferred  by  this  act,  forms 
of  return  have  been  prescribed,  in  which  the  various  items 
specified  in  the  law  are  to  be  stated.  Blank  forms  of  this 
return  will  be  forwarded  to  collectors  and  should  be  furnished 
to  every  corporation,  not  expressly  exempted,  on  or  before 
January  1  of  each  year,  in  the  case  of  corporations  making 
their  returns  for  the  calendar  year,  or  on  or  before  the  first 
day  of  the  next  fiscal  year  in  the  case  of  corporations  making 
returns  for  their  fiscal  year.  Failure  on  the  part  of  any  cor- 
poration, joint-stock  company,  association,  or  insurance  com- 
pany liable  to  this  tax  to  receive  a  prescribed  blank  form  will 
not  excuse  it  from  making  the  return  required  by  law,  or 
relieve  it  from  any  penalties  for  failure  to  make  the  return 
in  the  prescribed  time.  Corporations  not  supplied  with  the 
proper  forms  for  making  the  return  should  make  application 
therefor  to  the  Collector  of  Internal  Revenue  in  whose  dis- 
trict is  located  its  principal  place  of  business  in  ample  time 


Income  Tax  Regulations  151 

to  have  its  return  prepared,  verified,  and  filed  with  the  Col- 
lector on  or  before  the  last  due  date  as  hereinafter  defined. 
Failure  in  this  respect  subjects  it  not  only  to  50  per  cent 
additional  tax,  but  to  the  specific  penalty  imposed  for  de- 
linquency. Each  corporation  should  carefully  prepare  its 
return  so  as  to  fully  and  clearly  set  forth  the  data  therein 
called  for.  Imperfect  or  incorrect  returns  will  not  be  ac- 
cepted as  meeting  the  requirements  of  the  law. 

Penalties  Imposed  by  Act. 
Art.  164.  To  any  sum  or  sums  due  and  unpaid  after  the 
date  for  payment  stated  in  the  notice  and  demand  issued  by 
the  Collector,  there  shall  be  added  the  sum  of  5  per  cent  of 
the  amount  so  unpaid,  and  interest  at  the  rate  of  1  per  cent 
per  month.  To  the  amount  assessable  on  the  basis  of  the  net 
income  there  shall  be  added  50  per  cent  in  case  of  refusal  or 
neglect  of  a  corporation  to  make  a  return  or  100  per  cent  in 
case  of  a  false  or  fraudulent  return.  For  refusal  or  neglect 
to  make  a  return  within  the  prescribed  time,  or  for  a  false 
or  fraudulent  return,  the  corporation  so  offending  shall  be 
liable  to  a  specific  penalty  not  exceeding  $10,000.  Any  per- 
son divulging  unlawfully  any  information  whatever  disclosed 
by  a  return  shall  be  punished  by  a  fine  not  exceeding  $1,000, 
or  by  imprisonment  not  exceeding  one  year,  or  both. 

Fraudulent  Returns. 

Any  person  or  any  officer  of  any  corporation  required  by 
law  to  make,  render,  sign,  or  verify  any  return,  who  makes 
any  false  or  fraudulent  return  or  statement  with  intent  to 
defeat  or  evade  the  assessment  required  by  section  2,  act  of 
October  3,  1913,  shall  be  guilty  of  a  misdemeanor  and  shall 
be  fined  not  exceeding  $2,000  or  be  imprisoned  not  exceeding 
one  year,  or  both,  at  the  discretion  of  the  court,  with  the 
costs  of  prosecution. 

Fiscal  Year;  Hoiv  Established. 

Art.  165.  The  Federal  Income-tax  Law  authorizes  cor- 
porations, joint-stock  companies,  etc.,  under  certain  condi- 


152  Federal  Income  Tax 

tions  to  make  their  returns  ou  the  basis  of  an  established 
"fiscal  year"  or  consecutive  12-months  period,  which  may  be 
other  than  the  calendar  year. 

Pursuant  to  this  provision  the  following  instructions  are 
issued  for  the  guidance  of  collectors  and  other  interested 
parties : 

May  Designate  Day  for  Closing  of  Fiscal  Year  and  Must 
Give  at  Least  Thirty  Days  Notice  to  Collector  of  the  Day 
so  Designated. 

Any  corporation,  joint-stock  company,  or  association,  or 
any  insurance  company  subject  to  the  tax  imposed  by  this 
act  may,  at  its  option,  have  the  tax  payable  by  it  computed 
upon  the  basis  of  the  net  income  arising  or  accruing  from  all 
sources  during  its  fiscal  year,  provided  that  it  shall  designate 
the  last  day  of  the  month  selected  as  the  month  in  which  its 
fiscal  year  shall  close  as  the  day  of  the  closing  of  its  fiscal 
year,  and  shall,  not  less  than  thirty  days  prior  to  the  date 
upon  which  its  annual  return  is  to  be  filed,  give  notice,  in 
writing,  to  the  Collector  of  Internal  Revenue  of  the  district 
in  which  its  principal  place  of  business  is  located,  of  the  day 
it  has  thus  designated  as  the  closing  of  such  fiscal  year. 

Illustration  of  Fiscal  Year. 

Aet.  166.  In  pursuance  of  this  provision,  a  corporation 
or  like  organization  subject  to  this  tax  may,  for  example, 
designate  the  30th  day  of  September  as  the  day  for  the  closing 
of  its  fiscal  year,  whereupon  its  return  of  annual  net  income 
shall  be  filed  with  the  Collector  of  Internal  Revenue  of  the 
district  in  which  its  principal  place  of  business  is  located 
not  later  than  sixty  days  after  the  close  of  its  said  proposed 
fiscal  year ;  that  is  to  say,  on  or  before  the  29th  day  of  Novem- 
ber next  succeeding. 

The  date  of  the  closing  of  the  fiscal  year  having  been  desig- 
nated, notice  thereof  must  be  given  to  the  Collector  not  less 
than  thirty  days  prior  to  the  last  day  of  such  sixty-day  period. 
In  the  case  just  instanced  the  notice  must  be  given  not  later 
than  October  29. 


Income  Tax  Regulations  153 

If  such  designation  (September  30,  1913)  had  been  made 
and  notice  given,  as  hereinbefore  indicated,  as  to  the  closing 
of  the  fiscal  year  1913,  the  corporation  would  be  authorized 
to  make  its  return  and  have  the  tax  payable  by  it  computed 
upon  the  basis  of  the  net  income  arising  or  accruing  to  it 
during  the  period  from  January  1  to  September  30,  1913, 
both  dates  inclusive. 

Collectors  Must  Make  a  Record  of  the  Designation  of  the 
"Fiscal  Year." 
Art.  167.  Collectors  of  internal  revenue  receiving  notices 
of  the  selection  and  designation  of  the  "fiscal  years,"  as  above 
indicated,  will  make  record  of  the  same,  recording  (a)  the 
name  of  the  corporation  or  like  organization,  (b)  the  date 
when  notice  was  given,  (c)  the  day  designated  for  the  closing 
of  the  fiscal  year,  and  (d)  the  date  when  the  return  under 
such  designation  must  be  filed,  which  must  be,  as  above  stated, 
not  later  than  the  last  day  of  the  sixty-day  period  next  fol- 
lowing the  day  designated  as  the  close  of  the  fiscal  year. 

Unless  Notice  Was  Given  Within  Prescribed  Time,  Calendar 
Year  Will  Govern. 
Art.  168.  If  it  shall  appear  that  for  the  year  1913  the 
notice  was  given  within  the  prescribed  time — that  is,  within 
thirty  days  of  the  last  day  of  the  sixty-day  period — the  1913 
return  may  be  made  as  of  the  fiscal  year  so  established  ;  other- 
wise it  will  be  made  on  the  basis  of  the  calendar  year  until 
such  time  as  the  designation  shall  be  duly  made  and  notice 
thereof  properly  given. 

Designation  arid  Notice  Cannot  be  Retroactive. 
Art.  169.  The  designation  and  notice  cannot  be  retroac- 
tive ;  that  is  to  say,  if  a  corporation  now  designates  April  30, 
1914,  as  the  date  of  the  closing  of  its  fiscal  year  and  gives 
notice  of  such  designation,  it  would  not  be  authorized  to  make 
a  return  for  the  four  months  ended  April  30,  1913,  and  then 
for  the  fiscal  year  ended  April  30,  1914,  nor  would  it  be 
authorized  to  make  one  return  covering  the  entire  sixteen 


154  Federal  Income  Tax 

months  ended  April  30,  1914.  In  the  case  of  such  corpora- 
tion the  return  for  the  year  must  be  made  for  the  calendar 
year  ended  December  31,  1913,  and  then,  assuming  that  des- 
ignation and  notice  had  been  properly  made  and  given,  it 
may  make  a  return  for  the  four  months  ended  April  30,  1914, 
and  thereafter  the  return  will  be  made  on  the  basis  of  the 
fiscal  year  so  established. 

Where  Fiscal  Year  is  Not  Properly  Established,  Returns 
Must  be  Made  for  Calendar  Year. 

Art.  170.  In  all  cases  where  a  fiscal  year  is  not  established 
as  above  prescribed  returns  must  be  made  on  the  basis  of  the 
calendar  year,  in  which  case  such  returns  must  be  filed  on 
or  before  the  1st  day  of  March  next  succeeding  such  calendar 
year.  Such  returns  in  either  case  provided  must  be  verified 
under  oath  or  affirmation  of  its  president  or  other  principal 
officer,  and  its  treasurer  or  assistant  treasurer ;  that  is  to  say, 
by  two  different  persons  acting  in  the  official  capacity 
indicated. 

Returns  Made  on  Basis  of  Fiscal  Year  Not  so  Designated 
Cannot  be  Accepted. 

Aet.  171.  If  it  shall  appear  in  any  case  that  returns  have 
been  made  to  the  Collector  on  the  basis  of  a  fiscal  year  not 
designated  as  above  indicated,  the  corporations  making  such 
returns  will  be  advised  that  such  returns  cannot  be  accepted, 
but  must  be  made  to  cover  the  business  of  the  calendar  year. 

Returns  for  1918  Must  be  Made  on  Neiv  Forms. 

Art.  172.  Returns  made  under  this  act  and  pursuant  to 
these  instructions  must  be  made  on  the  new  forms  prescribed 
by  this  Department. 

The  forms  heretofore  in  use,  under  the  special  excise  tax 
law,  cannot  be  used  for  making  returns  for  either  the  fiscal 
or  calendar  year  1913. 


Income  Tax  Regulations  155 

Extension  Not  to  Exceed  Thirty  Days. 

Art.  173.  An  extension  of  time  within  which  a  return 
may  be  filed  can  in  no  case  exceed  thirty  days  from  the  date 
on  which  the  return  is  due  and  can  be  granted  only  upon 
written  application  to  the  Collector,  and  in  case  of  sickness 
or  absence  of  an  officer  whose  signature  to  the  return  is  re- 
quired, such  application  to  be  made  prior  to  the  expiration 
of  the  period  for  which  the  extension  is  desired. 

Returns  Properly  Mailed  in  Time  to  Reach  Collector  Not 
Subject  to  Penalty  Under  Certain  Conditions. 

Aet.  174.  If  a  return  is  made  and  placed  in  the  United 
States  mails,  properly  addressed,  and  postage  paid,  in  ample 
time,  in  due  course  of  mails,  to  reach  the  office  of  the  Collector 
or  deputy  collector  on  or  before  the  last  due  date,  no  penalty 
will  be  held  to  attach  should  the  return  not  be  actually  re- 
ceived by  such  officer  until  subsequent  to  that  date. 

Last  Due  Date  Defined. 

Art.  175.  "Last  due  date,"  as  hereinbefore  used,  is  con- 
strued to  mean  the  last  day  upon  which  a  return  is  required 
to  be  filed  in  accordance  with  the  provisions  of  the  law,  or 
the  last  day  of  the  period  not  exceeding  thirty  days  covered 
by  an  extension  of  time  granted  by  the  Collector. 

When  Due  Date  Falls  on  Sunday  or  Legal  Holiday. 

Art.  176.  When  the  due  date  as  above  defined  falls  on 
Sunday  or  on  a  legal  holiday,  the  last  due  date  will  be  held 
to  be  the  day  next  following  such  Sunday  or  legal  holiday, 
and  the  return  should  be  made  to  the  Collector  not  later  than 
such  following  day,  or,  if  placed  in  the  mails,  it  should  be 
posted  in  ample  time  to  reach  the  Collector's  office,  under 
ordinary  handling  of  the  mails,  on  or  before  the  date  on 
which  the  return  is  thus  made  due  in  the  office  of  the 
Collector. 


156  Federal  Income  Tax 

Assessment  and  Payment  of  Taxes.     Notice  of  Assessment. 

Aet.  177.  All  assessments  against  corporations,  etc.,  mak- 
ing returns  for  the  calendar  year  are  required  to  be  made  and 
the  several  corporations,  joint-stock  companies,  etc.,  notified 
of  the  amount  for  which  they  are  liable  on  or  before  the  1st 
of  June  of  each  successive  year,  and  said  assessments  shall 
be  paid  on  or  before  the  30th  day  of  June  of  such  year.  In 
the  case  of  corporations  making  returns  for  the  fiscal  year, 
the  assessments  shall  be  made  and  notice  given  on  or  before 
the  expiration  of  ninety  days  from  the  date  when  the  returns 
were  required  to  be  filed,  and  the  taxes  assessed  against  such 
corporations,  etc.,  shall  be  paid  within  one  hundred  and 
twenty  days  after  the  date  upon  which  the  returns  were  re- 
quired to  be  filed.  In  case  of  refusal  or  neglect  by  a  corpora- 
tion, etc.,  to  make  a  return,  and  in  case  of  false  or  fraudulent 
return,  the  Commissioner,  upon  the  discovery  thereof  within 
three  years  after  such  returns  are  due,  shall  make  a  return 
upon  information  obtained  in  the  manner  provided  in  the 
act,  and  the  assessment  made  on  the  basis  of  such  return 
shall  be  paid  immediately  upon  notice  and  demand  given  by 
the  Collector. 

Failure  to  Pay  Tax  When  Due. 

Upon  failure  to  pay  the  tax  when  due  and  for  ten  days 
after  notice  and  demand,  a  penalty  of  5  per  cent  of  the 
amount  of  the  tax  unpaid  and  interest  at  the  rate  of  1  per 
cent  per  month  until  paid  shall  be  added  to  the  amount  of 
such  tax. 

Returns  Are  Public  Records,  Subject  to  Inspection   Upon 
Order  of  the  President. 

Art.  178.  When  the  assessments  shall  have  been  made,  the 
returns  shall  be  filed  in  the  office  of  the  Commissioner  and 
shall  constitute  public  records,  subject  to  inspection  upon  the 
order  of  the  President,  under  rules  and  regulations  pre- 
scribed by  the  Secretary  of  the  Treasury  and  approved  by  the 
President.     Copies  of  returns  on  file  in  the  Commissioner's 


Income  Tax  Regulations  157 

office  are  not  permitted  to  be  sent  to  any  person,  except  to  the 
corporation  itself  or  to  its  duly  authorized  attorney. 

Information  to  States  Which  Impose  Income  Taxes. 

Art.  179.  Upon  request  of  the  Governor  of  a  State  which 
imposes  a  general  income  tax,  the  proper  officers  of  such 
State  may  have  access  to  the  returns  filed  by  corporations 
doing  business  in  such  States,  or  to  an  abstract  thereof  show- 
ing the  name  and  income  of  such  corporations,  etc.,  at  such 
times  and  in  such  manner  as  the  Secretary  may  prescribe. 
In  no  case  are  the  original  returns  to  be  removed  from  the 
office  of  the  Commissioner,  except  upon  order  and  by  direc- 
tion of  the  Secretary  of  the  Treasury  or  the  President. 

Certified  Copies  of  Returns. 

Art.  180.  At  the  request  of  the  Attorney  General,  or  by 
direction  of  the  Secretary  of  the  Treasury,  certified  copies 
of  returns  may  be  made  and  delivered  to  the  United  States 
district  attorneys  for  their  use  as  evidence  in  the  prosecution 
or  defense  of  suits  in  which  the  collection  or  legality  of  the 
tax  assessed  on  the  basis  of  such  returns  is  involved,  or  in  any 
suit  to  which  the  United  States  Government  and  the  corpora- 
tion, etc.,  making  the  return  are  parties  and  in  which  suit 
such  certified  copies  would  constitute  material  evidence. 

Penalty  for  Giving  Information  in  Regard  to  Returns. 

Art.  181.  The  disclosure  by  any  collector,  deputy  col- 
lector, agent,  clerk,  or  other  officer  or  employee  of  the  United 
States  to  any  person  of  any  information  whatever  contained 
in  or  set  forth  by  any  return  of  annual  net  income  made  pur- 
suant to  this  act  is,  by  the  act,  made  a  misdemeanor,  and  is 
punishable  by  a  fine  not  exceeding  $1,000  or  by  imprison- 
ment not  exceeding  one  year,  or  both,  at  the  discretion  of  the 
court,  and  if  the  offender  is  an  officer  or  employee  of  the 
United  States  he  shall  be  dismissed  and  be  incapable  there- 
after of  holding  any  office  under  the  United  States  Govern- 
ment. 


158  Federal  Income  Tax 

Bookkeeping. 

Art.  182.  No  particular  system  of  bookkeeping  or  account- 
ing will  be  required  by  the  department.  However,  the  busi- 
ness transacted  by  corporations  must  be  so  recorded  that  each 
and  every  item  set  forth  in  the  return  of  annual  net  income 
may  be  readily  verified  by  an  examination  of  the  books  of 
account. 

Books  of  Account  Best  Guide  to  Income. 

Aet.  183.  The  books  of  a  corporation  are  assumed  to  re- 
flect the  facts  as  to  its  earnings,  income,  etc.  Hence  they  will 
be  taken  as  the  best  guide  in  determining  the  net  income  upon 
which  the  tax  imposed  by  this  act  is  calculated.  Except  as 
the  same  may  be  modified  by  the  provisions  of  the  law, 
wherein  certain  deductions  are  limited,  the  net  income  dis- 
closed by  the  books  and  verified  by  the  annual  balance  sheet, 
or  the  annual  report  to  stockholders,  should  be  the  same  as 
that  returned  for  taxation. 

Omitted  Taxes  May  be  Assessed. 

Aet.  184.  In  cases  wherein  corporations  have  neglected  or 
refused  to  make  returns,  and  in  cases  wherein  returns  made 
are  found,  upon  investigation  or  otherwise,  to  be  false  ox 
fraudulent,  the  Commissioner  may,  upon  discovery  thereof,  at 
any  time  within  three  years  after  said  return  is  due,  make 
return  upon  the  information  obtained  in  the  manner  provided 
in  the  act,  and  the  tax  so  discovered  to  be  due,  together  with 
the  additional  tax  prescribed,  shall  be  assessed,  and  the 
amount  thereof  shall  be  paid  immediately  upon  notice  and  de- 
mand. 

Corporations  Subject  to  Normal  Tax. 

Aet.  185.  Corporations  coming  within  the  terms  of  this 
law  are  subject  to  the  normal  tax  only ;  that  is,  a  tax  computed 
at  a  level  rate  of  1  per  cent  of  their  entire  net  income  regard- 
less of  the  amount  of  such  net  income. 


Income  Tax  Regulations  159 

Examination  of  Books. 
Art.  186.  For  the  purpose  of  verifying  any  return,  made 
pursuant  to  this  act,  the  Commissioner  of  Internal  Revenue 
may,  by  any  duly  authorized  revenue  agent  or  deputy  collec- 
tor, cause  the  books  of  such  corporation  to  be  examined,  and 
if  such  examination  discloses  that  the  corporation  is  liable  to 
tax  in  addition  to  that  previously  assessed,  os  assessable,  the 
same  shall  be  assessed  and  shall  be  payable  immediately  upon 
notice  and  demand.  For  the  purpose  of  such  examination, 
the  books  of  corporations  shall  be  open  to  the  examining  offi- 
cer, or  shall  be  produced  for  this  purpose  upon  summons 
issued  by  any  properly  authorized  officer. 


PART  4 

Assessment  and  Collection. 

Taxes  Due  to  be  Reported  on  Assessment  List. 

Art.  187.  All  income  taxes  found  to  be  due  will  be  re- 
ported by  collectors  on  their  assessment  lists,  Form  23-A  in 
the  case  of  corporations,  and  on  Form  23-B  in  the  case  of  indi- 
viduals and  withholding  agents. 

Names  to  be  Listed  in  Alphabetical  Order.     Na?nes  of 
Withholding  Agents,  How  to  be  Listed. 

Aet.  188.  The  names  of  corporations  subject  to  tax  will  be 
listed  on  Form  23-A,  according  to  their  designated  class,  and 
in  alphabetical  order  as  to  each  class.  Names  of  individuals 
subject  to  tax  will  be  listed  on  Form  23-B,  alphabetically, 
without  reference  to  class  or  rate  of  tax.  Following  such 
names  there  will  be  listed,  alphabetically,  the  names  of  all 
withholding  or  licensed  collecting  agents,  and  the  aggregate 
amount  of  tax  withheld  by  each,  as  shown  by  the  annual  re- 
turns rendered  by  them.  An  assessment  against  each  person, 
firm  or  company  from  whose  income  the  tax  has  been  so 
withheld  will  be  unnecessary  in  such  cases. 

Assessment  Against  Withholding  Agents  to  be  Deferred  Until 
Annual  Reports  Are  Received. 

Aet.  189.  To  avoid,  as  far  as  possible,  the  assessment  of 
taxes  as  to  which  claims  for  exemption  or  deduction  may  be 
filed  under  Article  33,  collectors  will  delay  reporting  for 
assessment  taxes  remaining  in  the  hands  of  withholding 
agents  until  the  annual  reports  of  such  agents,  which  must 
be  filed  not  later  than  March  1  in  each  year,  are  received. 

Returns,  When  to  be  Made. 

Aet.  190.  Returns  of  withholding  agents  (including  those 
of  licensed  collecting  agents)  as  to  interest  payments  shall  be 
made  monthly  and  returns  containing  summaries  of  said 
monthly  returns  shall  be  made  annually.     (See  Part  2,  A,  B, 


Income  Tax  Regulations  161 

and  C.)  Returns  of  individuals  (see  Part  1),  corporations 
(see  Part  3),  and  -withholding  agents,  withholding  tax  on 
wages,  salaries,  rents,  etc.  (see  Part  2,  D),  and  fiduciaries  act- 
ing as  withholding  agents  (see  Part  2,  E)  shall  be  made  annu- 
ally. All  monthly  returns  are  required  to  be  made  on  or 
before  the  20th  day  of  each  month  for  the  preceding  month. 
All  annual  returns  are  required  to  be  made  on  or  before  the 
1st  day  of  March  in  each  year,  except  in  the  case  of  corpora- 
tions which  have  given  due  notice  of  the  termination  of  their 
fiscal  year,  in  which  cases  the  prescribed  return  is  to  be  filed 
within  60  days  after  the  termination  of  such  fiscal  year. 

Corporations  May  Include  in  Returns  for  Year  1913  Income 
Subject  to  Special  Excise  Tax. 

Art.  191.  Corporations  which  are  subject  to  the  special 
excise  tax  on  income  received  during  the  months  of  January 
and  February,  1913,  may,  under  the  provisions  of  section  4, 
paragraph  S,  of  the  act  of  October  3,  1913,  include  such  in- 
come, as  also  the  income  taxable  under  said  act,  in  one  return 
for  the  year  1913.  In  each  such  case  one  assessment  only  will 
be  made. 

Returns  of  Income  to  be  Foricarded  With  Assessment  Lists. 
False  or  Fraudulent  Returns. 

Art.  192.  All  returns  of  income,  whether  of  individuals  or 
corporations,  should  be  forwarded  with  the  assessment  list 
rendered.  Where  in  any  case  the  collector  has  reason  to  be- 
lieve that  any  return  rendered  is  false  or  fraudulent,  he  will 
prepare  and  retain  in  his  office  a  copy  of  such  return,  and  will 
note  on  the  original  and  under  the  head  of  "Remarks"  of  his 
assessment  list  the  words  "Investigation  pending."  He  will 
in  all  such  cases  make  his  investigation  in  the  manner  pre- 
scribed in  section  3173,  Revised  Statutes,  and  paragraph  D 
of  said  act  of  October  3,  1913 ;  and  he  will  report  the  results 
of  his  investigation  to  the  Commissioner  of  Internal  Revenue, 
referring  to  the  list,  folio,  and  line  on  which  the  assessment 
was  reported.  (Amended  T.  D.  2024.) 
11 


162  Federal  Income  Tax 

Certain  Returns  of  Withholding  Agents  to  be  in  Duplicate. 

Art.  193.  Monthly  and  annual  returns  of  withholding 
agents  (including  those  of  licensed  agents)  as  to  interest  pay- 
ments and  the  annual  returns  of  withholding  agents  withhold- 
ing tax  on  wages,  salaries,  etc,  will  be  made  in  duplicate,  one 
copy  of  which  will  be  retained  by  the  collector  in  his  office 
and  one  copy  transmitted  to  the  Commissioner  of  Internal 
Revenue.  Annual  returns  of  withholding  agents  (including 
those  of  licensed  agents)  as  to  interest  payments,  and  returns 
of  withholding  agents  as  to  wages,  salaries,  etc.,  and  of  fiduci- 
aries will  be  forwarded  by  the  collector  with  his  list,  Form 
23-B,  on  which  the  tax  withheld  is  reported  for  assessment. 

Certificates  and  Returns  to  be  Forwarded  as  Soon  as  Received. 

Abt.  194.  All  certificates  of  exemption  or  deductions,  filed 
by  or  on  behalf  of  persons  subject  to  tax,  will  be  forwarded 
by  the  collector  as  soon  as  received ;  and  all  such  certificates, 
reports,  and  returns,  before  being  transmitted  to  the  commis- 
sioner, will  have  stamped  thereon  the  name  and  number  of 
the  district;  will  be  arranged  (unfolded)  in  alphabetical 
order  and,  in  the  case  of  corporations,  according  to  the  desig- 
nated class  to  which  they  belong.  Care  should  be  taken  to 
have  all  such  papers,  when  so  arranged,  carefully  secured  by 
cord  or  other  fastening,  so  as  to  insure  their  receipt  in  like 
order.  This  is  especially  necessary  in  view  of  the  large  num- 
ber of  like  papers  which  will  be  forwarded  from  the  various 
districts. 

Reports  and  Returns  to  be  at  Once  Examined  by  Collectors. 

Art.  195.  In  order  that  assessment  lists  may  be  promptly 
prepared  and  forwarded,  collectors  will  see  that  all  reports 
and  returns  to  be  listed  are  examined  as  received,  and  that  no 
delay  occurs  in  this  branch  of  the  work.  Special  diligence 
in  this  matter  is  necessary,  as  sufficient  time  must  be  given 
for  the  reexamination  of  such  returns  in  the  commissioner's 
office  before  assessment  is  made.     The  forwarding  of  assess- 


Income  Tax  Regulations  163 

ment  lists,  however,  should  in  no  case  be  delayed,  beyond  the 
time  allowed,  on  account  of  unexamined  returns,  as  such  re- 
turns can  be  examined  and  reported  on  a  subsequent  list.  As 
the  law  limits  the  time  in  which  these  assessments  are  to  be 
made  and  notice  of  assessment  given,  collectors  will  assign  to 
this  work  all  available  force  in  their  respective  offices. 

Notice  to  be  Sent  to  Delinquents. 

Art.  196.  Where  the  required  returns  are  not  filed  within 
the  prescribed  time,  either  by  individuals  or  corporations, 
notice  on  Form  1045  should  in  each  case  be  sent  to  the  de- 
linquent. (For  authorized  extension  of  time,  see  Articles  23 
and  173.) 

Notice  of  Assessment.     Demand  for  Tax,  Penalty,  and 
Interest. 

Art.  197.  When  assessment  has  been  made,  collectors  will, 
on  receipt  of  their  returned  lists,  at  once  issue  preliminary 
notices  of  assessment  (Form  647),  and  where  in  any  case  the 
tax  assessed  is  not  paid  on  or  before  the  30th  day  of  June  or, 
in  case  of  corporations  designating  their  own  fiscal  year, 
within  120  days  following  the  date  on  which  the  return 
should  have  been  filed,  notice  and  demand  (Form  17)  should 
be  at  once  issued,  and  unless  the  tax  in  such  case  is  paid 
within  10  days  after  the  service  of  such  notice,  general  de- 
mand for  tax,  penalty,  and  interest  (Form  21)  should  at 
once  be  issued.  Immediate  notice  and  demand  (Form  17) 
will,  however,  be  served  in  case  of  failure  to  file  the  required 
return  within  the  statutory  period. 

Notice  of  Assessment  to  be  Sent  Immediately  on  Return 

of  List. 

Art.  198.  Pending  assessment  on  returns  forwarded  to  the 
commissioner,  collectors  will  have  prepared  the  necessary 
notices  of  assessment,  with  properly  addressed  envelopes,  to 
be  used  immediatelv  on  return  of  their  assessment  lists. 


164  Federal  Income  Tax 

Payments,  Abatements,  and  Outstanding  Balances. 

Akt.  199.  Statements  of  payment,  abatement,  and  out- 
standing balances  of  sucb  assessed  taxes  will  be  rendered 
monthly  by  collectors  on  special  Form  325.  Sucb  statements 
will  be  prepared  in  tbe  same  manner  as  required  in  tbe  case 
of  assessments  on  tbe  regular  Form  23,  except  tbat  in  State- 
ment III  tbe  outstanding  balances  on  tbe  various  lists  will  bo 
reported  in  aggregate  only.  Items  constituting  sucb  balances, 
bowever,  will  be  carded  by  collectors,  but  only  as  to  sucb  as 
were  assessed  during  the  month  for  which  the  return  is  ren- 
dered, thus  avoiding  detailed  statements  each  month  of  out- 
standing balances  previously  reported.  A  separate  card 
(Form  1020)  will  be  used  for  each  such  item;  and  all  cards 
so  prepared  each  month  should  be  arranged  alphabetically, 
and  so  forwarded  by  the  collector  with  his  report  on  special 
Form  325.  W.  H.  Osborn, 

Commissioner  of  Internal  Revenue. 

Approved : 

W.  G.  McAdoo, 

Secretary  of  the  Treasury. 


PART  IV 


TREASURY  DEPARTMENT  SPECIAL  RULINGS 


Sixty-six  decisions,  construing  the  law,  supplementary  to 
the  preceding  199  articles.  The  ones  given  here  are  the 
Treasury  Department  rulings  concerning  the  income  tax, 
from  T.  D.  1892,  November  6,  1913,  to  T.  D.  2289,  Jan- 
uary 28,  1916,  and  all  are  given  except  a  few  of  temporary 
application  which  are  now  obsolete.  The  usual  headings  and 
signatures  are  omitted  from  all  after  the  first.  See  general 
subjects  in  Table  of  Contents,  and  detailed  references  in 
Index. 


TREASURY  DEPARTMENT  SPECIAL  RULINGS 

(T.  D.  1892.) 

Income  Tax. 

Interest  upon  obligations  of  the  United  States  or  its  possessions,  or 
of  any  State,  county,  city,  or  any  other  political  subdivision 
thereof,  is  not  subject  to  income  tax. 

Treasury  Department, 
Office  of  Commissioner  of  Internal,  Revenue, 

Washington,  D.  C,  November  6,  1913. 

To  collectors  of  internal  revenue: 

It  has  been  called  to  the  attention  of  this  office  that  banks  in 
certain  sections  are  refusing  to  pay  coupons  for  interest  on 
bonds  of  States,  counties,  cities,  or  other  political  subdivisions 
of  the  United  States,  when  such  coupons  are  not  accompanied 
by  certificates  of  ownership,  without  deducting  the  normal  in- 
come tax  of  1  per  cent,  which  the  law  and  the  regulations  of 
this  department  require  shall  be  deducted  at  the  source  in  pay- 
ing the  interest  on  bonds  of  corporations,  joint-stock  compa- 
nies or  associations,  and  insurance  companies. 

Please  inform  all  parties  interested,  giving  the  information 
wide  publicity,  that  the  income  derived  from  the  interest  upon 
the  obligations  of  a  State,  county,  city,  or  any  other  political 
subdivision  thereof,  and  upon  the  obligations  of  the  United 
States  or  its  possessions,  is  not  subject  to  the  income  tax,  and 
a  certificate  of  ownership  in  connection  with  the  coupons  or 
registered  interest  orders  for  such  interest  will  not  be  re- 
quired. 

The  interest  coupons  should  clearly  show  on  their  face 
whether  they  are  issued  by  the  United  States  or  any  political 
subdivision  thereof.  If,  however,  they  do  not  clearly  show 
this,  then,  of  course,  an  ownership  certificate  should  be  re- 
quired W.  H.  Osborn,  Commissioner. 


168  Federal  Income  Tax 


(T.  D.  1933— See  T.  D.  1996.) 

Mutual  telephone  companies,  mutual  Insurance  companies,  and  like 
organizations  whose  status,  under  the  law,  is  not  dependent 
upon  whether  or  not  they  are  organized  tor  profit,  and  not  being 
specifically  enumerated  as  exempt,  must  make  returns  of  an- 
nual net  income  pursuant  to  the  requirements  of  section  2,  act 
of  October  3,  1913. 

This  office  is  in  receipt  of  your  letter  asking  advice  as  to 
whether  or  not  mutual  telephone  companies  will  be  required 
to  file  returns  of  annual  net  income  under  the  provisions  of 
section  2,  act  of  October  3,  1913. 

In  reply  you  are  informed  that  under  the  provisions  of  the 
act  above  cited,  every  corporation,  joint-stock  company,  and 
every  insurance  company,  no  matter  how  created  or  organized, 
is  subject  to  the  income  tax  and  will  be  required  to  make 
returns  of  annual  net  income,  except  such  as  are  specifically 
enumerated  in  the  act  as  exempt  from  its  provisions.  In  the 
list  of  those  so  enumerated  as  exempt  do  not  appear  mutual 
telephone  companies  or  similar  organizations. 

Since  under  this  act  no  exemption  is  provided,  either  ex- 
press or  implied,  for  mutual  telephone  and  like  companies, 
and  liability  is  not  dependent  upon  whether  or  not  the  corpo- 
ration is  organized  for  profit,  it  is  held  that  all  corporations 
not  specifically  enumerated  as  exempt  will  be  required  to 
make  returns  of  annual  net  income  and  to  pay  any  tax  that 
may  be  assessed  upon  the  net  income  returned. 

This  ruling  will  comprehend  all  telephone  companies,  local 
insurance  companies,  and  like  corporations,  whether  or  not 
they  are  organized  primarily  for  the  mutual  benefit  of  their 
members. 


Treasury  Department  Special  Rulings         169 

(T.  D.  1937.) 

Corporations  are  not  permitted  to  deduct  from  gross  or  net  income 
for  the  year  1913  any  portion  of  specific  exemption  authorized 
under  corporation  tax  law. — Sec.  38,  act  Aug.  5,  1909. 

Section  2  of  the  act  approved  October  3,  1913,  known  as 
the  Federal  Income  Tax  Law,  provides  that  all  corporations, 
joint-stock  companies,  and  all  insurance  companies,  except 
those  specifically  enumerated  as  exempt,  shall  be  subject  to 
the  normal  tax  imposed  upon  individuals,  such  tax  to  be 
levied,  assessed,  and  paid  annually  upon  the  entire  net  in- 
come arising  or  accruing  from  all  sources  during  the  preced- 
ing calendar  year. 

The  provisions  of  this  act  apply  to  corporations  which  have 
or  may  have  income  arising  or  accruing  on  and  after  March 
1,  1913.  For  the  purpose  of  covering  the  liability  of  corpora- 
tions to  special  excise  tax  for  the  months  of  January  and  Feb- 
ruary, 1913,  the  provisions  of  the  corporation  tax  law  (sec. 
38,  act  August  5,  1909)  were  extended,  and  in  subsection  S  of 
the  income  tax  law  it  is  provided  that  the  net  income  for  these 
two  months  shall  be  ascertained  in  accordance  with  the  provi- 
sions of  subsection  G  of  section  2  of  the  act  of  October  3, 
1913,  that  is,  in  the  same  manner  as  the  net  income  for  the 
remaining  10  months  of  the  year  is  ascertained. 

In  the  subsection  G,  just  cited,  all  items  or  charges  against 
income,  which  constitute  allowable  deductions  from  gross  in- 
come, are  specifically  set  out.  Xo  provision,  either  express  or 
implied,  is  made  in  this  subsection  or  elsewhere  in  the  act  for 
the  allowance  of  all  or  any  portion  of  the  specific  exemption 
($5,000)  allowed  under  the  corporation  tax  law.  As  applied 
to  the  months  of  January  and  February,  1913,  the  income  tax 
law  in  effect  amends  the  corporation  tax  law  by  eliminating 
the  specific  exemption  previously  allowed,  and  provides  that 
the  tax  for  that  period  shall  be  measured  by  the  net  income 
ascertained  according  to  the  rule  set  out  in  subsection  G  of  the 
later  act.     (See  second  proviso  in  subsec.  S,  act  Oct.  3,  1913.) 


170  Federal  Income  Tax 

The  third  proviso  of  subsection  S  also  provides  that — 

For  the  year  1913  it  shall  not  be  necessary  to  make  more  than 
one  return  and  assessment  for  all  taxes  imposed  *  *  *  by  way 
of  income  or  special  excise. 

The  net  income  for  both  kinds  of  taxes  and  for  both  periods 
of  the  year  being  ascertained  in  exactly  the  same  manner,  but 
one  return  covering  the  entire  calendar  year  1913  is  required. 
That  return  will  show  the  entire  net  income  ascertained  in 
accordance  with  the  provisions  of  the  income  tax  law,  and  no 
specific  exemption  whatever  being  authorized,  such  net  income 
as  returned  for  the  entire  year  will  be  the  amount  upon  which 
the  tax  is  computed. 


(T.  D.  1943.) 

Instructions  to  collectors  relative  to  fiduciaries  and  returns  to  be 
made  by  them  on  Form  1041. 

To  collectors  of  internal  revenue: 

T.  D.  1908  provides  that  all  fiduciaries  shall  on  or  before 
March  1  of  each  year,  when  the  annual  interest  of  any  bene- 
ficiary in  the  income  of  the  estate  or  trust  is  in  excess  of 
$3,000  ($2,500  for  the  year  1913),  make  and  render  a  return 
of  the  income  of  the  person  or  persons  (the  beneficiaries)  for 
whom  they  act  to  the  collector  of  internal  revenue  of  the  dis- 
trict in  which  the  fiduciary  resides. 

Where  a  decedent  died  after  March  1  in  the  year  1913,  and 
from  March  1  up  to  the  date  of  his  death  had  a  net  income  of 
$2,500  or  more,  the  fiduciary  (i.  e.,  the  executor  or  adminis- 
trator) should  make  a  return  for  the  decedent  on  Form  1040, 
and  the  income  tax,  both  normal  and  additional,  shown  to  be 
due  thereon  will  be  a  debt  against  the  estate  of  the  decedent. 
The  same  principle  will  apply  to  subsequent  years  if  the  net 
income  of  the  decedent  from  January  1  to  the  date  of  his  death 
amounts  to  $3,000  or  more.  No  other  return  is  required  to 
be  made  by  the  fiduciary  until  the  settlement  of  the  estate  has 
reached  the  stage  when  the  beneficiaries  thereof  and  their  re- 


Tkeastjky  Depaktment  Special  Rulings         171 

spective  interests  in  the  income  derived  from  the  estate  are  de- 
terminable, and  then  the  fiduciary  is  required  to  file  a  return 
on  or  before  March  1  of  each  year,  as  prescribed  by  the  regu- 
lations. 

The  fiduciary  will  enter  on  page  2  of  Form  1041,  under  the 
appropriate  heads,  all  income  accruing  to  the  beneficiaries  of 
the  trust  or  estate  from  March  1  to  December  31,  1913,  in- 
clusive; but  the  interest  derived  from  the  obligations  of  a 
State  or  any  political  subdivision  thereof  and  the  obligations 
of  the  United  States  or  its  possessions  is  not  to  be  included. 

The  fiduciary  will  enter  on  page  3  of  Form  1041  for  the 
year  1913  five-sixths  of  the  deductions  allowable  under  para- 
graph B  of  the  law,  and  on  line  1  it  will  be  proper  for  the 
fiduciary  to  enter  all  legitimate  expenses  incurred  in  adminis- 
tering the  estate  or  trust.  If  the  fiduciary  holds  and  rents 
business  or  residential  i>roperty  and  pays  insurance,  water 
rents,  commissions  for  the  collection  of  rents,  or  any  other 
necessary  expenses  in  managing  the  estate  or  trust,  it  will  be 
proper  to  enter  same  on  line  1  as  an  allowable  deduction. 

The  amount  to  be  shown  on  page  1,  line  3,  will  represent 
the  total  amount  of  income  accruing  through  the  fiduciary  to 
the  beneficiaries  of  the  estate  or  trust  which  is  subject  to  the 
normal  tax,  and  when  the  interest  of  any  one  beneficiary  iD 
this  amount  from  November  1  to  December  31,  1913,  inclu- 
sive, was  in  excess  of  $3,000,  whether  distributed  or  not,  the 
fiduciary  was  required  to  withhold  and  pay  the  normal  tax  on 
the  whole  $3,000  and  excess  thereof,  unless  the  beneficiary 
filed  with  the  fiduciary  Form  1007,  as  prescribed  by  the  regu- 
lations, claiming  exemption  under  paragraph  C,  and  in  that 
event  the  fiduciary  was  only  required  to  withhold  and  pay  the 
normal  tax  on  the  amount  in  excess  of  the  exemption  claimed. 

T.  D.  1906  prescribes  that  when  fiduciaries  make  their 
annual  return  they  shall  give  the  name  and  full  address  of 
each  beneficiary  and  the  share  of  income  to  which  each  may 
be  entitled,  which  information  shall  be  given  on  page  1  of 
Form  1041.  In  the  column  "Amount  of  income  paid  or  ac- 
crued to  beneficiaries"  should  be  entered  the  respective  in- 


172  Federal  Income  Tax 

terest  of  the  beneficiary  in  the  amount  of  income  as  shown  on 
page  1,  line  3. 

When  the  interest  of  any  beneficiary  in  the  amount  of  in- 
come subject  to  the  normal  tax,  as  shown  on  Form  1041,  page 
1,  line  3,  is  in  excess  of  $3,000,  and  the  same  was  paid  to  the 
beneficiary  within  the  period  from  November  1  to  December 
31,  1913,  both  dates  inclusive,  the  fiduciary  was  required  to 
withhold  and  pay  the  normal  tax  as  prescribed  by  the  regula- 
tions, and  the  information  required  should  be  given  on  Form 
1041,  page  1,  giving  the  name  and  full  address  of  each  bene- 
ficiary, the  amount  of  income  paid  or  payable  to  each  bene- 
ficiary (this  amount  would  be  the  beneficiary's  interest  in  the 
amount  of  income  subject  to  the  normal  tax  as  shown  on  line 
3),  the  amount  of  exemption  claimed  under  paragraph  C  (if 
any),  the  amount  of  income  on  which  normal  tax  should  be 
withheld,  and  the  amount  of  tax  withheld,  all  to  be  given  in 
the  respective  columns  in  the  order  named. 

A  fiduciary  acting  for  a  minor  or  insane  person  who  had  a 
net  income  of  $2,500  or  more  for  the  year  1913  will  make  the 
return  for  his  ward  on  Form  1040  and  will  not  be  required  to 
file  a  return  on  Form  1041,  unless  he  has  more  than  one  ward 
by  reason  of  the  same  estate  or  trust ;  then  in  that  event  a  re- 
turn will  be  required  on  Form  1041,  and  a  separate  return 
on  Form  1040  for  each  ward  having  a  net  income  of  $2,500 
or  more  for  the  year  1913. 

The  income  accruing  or  paid  to  a  beneficiary  through  a 
fiduciary  may  be  composed  in  part  of  dividends,  or  income 
upon  which  the  normal  tax  has  been  withheld  and  paid  or  to 
be  paid  at  the  source,  or  income  derived  from  the  obligations 
of  a  State  or  any  political  subdivision  thereof  or  from  the 
obligations  of  the  United  States  or  its  possessions  (income 
from  obligations  of  a  State  or  any  political  subdivision  thereof 
and  from  the  obligations  of  the  United  States  or  its  posses- 
sions is  not  subject  to  the  tax  and  should  not  be  included). 
If  a  beneficiary  has  other  income  which,  added  to  the  income 
accruing  to  him  through  his  fiduciary,  gives  him  a  net  income 


Treasury  Department  Special  Rulings         173 

of  $2,500  or  more  for  the  period  from  March  1  to  December 
31,  1913,  inclusive,  he  should  make  a  return  of  his  gross  in- 
come on  Form  1010,  as  required  by  the  regulations. 

To  illustrate:  If  a  fiduciary's  gross  income  was  $10,000, 
derived  from  the  following  sources : 

1.  Interest  upon  the  obligations  of  the  United  States $  1,000 

2.  Dividends  on  stock  or  net  earnings  of  corporations 2,000 

3.  Interest  from  bonds  containing  "tax-free  covenant  clause," 

upon  which  the  fiduciary  did  not  claim  any  exemption  at 
source  and  which  he  entered  on  Form  1041,  on  page  2, 
column  A,  as  income  on  which  normal  tax  was  withheld.     2,000 

4.  Income  from  rents,  etc 5,000 

$10,000 


the  fiduciary's  return  on  Form  1011  would  show  as  follows: 

Page  2.  Line  3,  column  B,  amount  of  rents $5,000 

Line  5,  interest  from  bonds,  "tax-free  clause,"  column 

A    2,000 

Line  10,  dividends    2,000 

Aggregate  total  of  gross  income $9,000 

(No  entry  of  interest  on  United  States  bonds,  $1,000.) 

Page  3.  Line  1,  necessary  expenses  actually  paid  in  carrying 

on   business,   including  compensation   of  fiduciary, 

water  rents,  insurance,  etc $       450 

Line  3,  taxes  paid   400 

Line  6,  actual  repairs  made  on  building,  or  amount 

allowed  for  wear  and  tear 150 

Line  7,  dividends  not  subject  to  normal  tax 2,000 

Line  8,  amount  of  income  on  which  normal  tax  has 
been  deducted  and  withheld  at  source,  bonds  with 
"tax-free  clause"   2,000 

Total  deductions  $5,000 

Page  1.  Line  1,  gross  income  $9,000 

Line  2,  total  deductions   5,000 

Line  3,  amount  of  income  due  beneficiary,  which  is 
subject   to   normal    tax $    4,000 


174  Federal  Income  Tax 

The  beneficiary  has  filed  with  the  fiduciary  as  a  withhold- 
ing agent  a  claim  for  exemption  tinder  paragraph  C  for 
$2,500  (exemption  of  single  person  for  1913),  and  the  return 
on  Form  1041  would  show  on  page  1,  in  addition  to  the  fore- 
going entries,  the  following : 

John  Doe,  76  B  Street,  New  York  City. 

In  third  column,  amount  of  income  paid  or  accrued  to  benefi- 
ciary       $4,000 

In  fourth  column,  amount  of  exemption  claimed 2,500 

In  fifth  column,  amount  of  income  on  which  fiduciary  is  liable 
to  tax   1,500 

In  sixth  column,  amount  of  normal  tax  withheld 15 

In  the  foregoing  illustration  the  beneficiary,  in  his  return 
on  Form  1040,  would  make  no  return  of  item  1,  interest  on 
United  States  bonds.  Item  2,  dividends,  would  be  entered 
on  page  2,  line  11,  and  for  the  purpose  of  calculating  the 
normal  tax  would  be  an  allowable  deduction  on  page  1,  line  4. 
Item  3,  interest  on  bonds,  would  be  entered  on  page  2,  line  7, 
column  A,  and  for  the  purpose  of  calculating  the  normal  tax 
would  be  an  allowable  deduction  on  page  1,  line  5.  Item  4, 
rents,  would  be  entered  on  page  2,  line  7 ;  $1,500  in  column 
A,  and  $2,500  in  column  B  (exemption  of  $2,500  claimed  and 
no  tax  withheld  on  this  amount).     This  would  show — 

Income  received  from  fiduciary  subject  to  be  returned  on 
Form  1040 $8,000 

Deductions  and  exemption  allowable  in  calculating  normal 
tax   8,000 

No  normal  tax  due,  it  having  been  paid  at  the  source  by  the 
fiduciary  as  shown  by  his  return  on  Form  1041. 

In  making  the  foregoing  entry  on  Form  1040,  on  line  11, 
there  should  be  written  just  above  the  printed  heading, 
"Amount  received  from  fiduciary,"  and  the  amount  should 
be  entered  in  the  appropriate  column. 

No  illustration  is  given  of  income  accruing  to  the  benefi- 
ciary from  other  sources,  an  illustration  of  this  not  being 
deemed  necessary,  as  such  income  is  entered  in  the  usual  way. 


Treasury  Department  Special  Rulings         175 


(T.  D.  1945— See  T.  D.  1947.) 

Regulation  relative  to  exclusion  of  income  derived  from  dividends 
or  net  earnings  of  corporations,  joint-stock  companies  or  associ- 
ations, and  insurance  companies  by  persons  subject  to  the  nor- 
mal tax  only  in  computing  their  net  income  for  the  taxable 
year. 

Referring  to  that  provision  of  the  income-tax  law  which 
reads  as  follows : 

Provided  further,  That  persons  liable  for  the  normal  income  tax 
only,  on  their  own  account  or  in  behalf  of  another,  shall  not  be 
required  to  make  return  of  the  income  derived  from  dividends  on 
the  capital  stock  or  from  the  net  earnings  of  corporations,  joint- 
stock  companies  or  associations,  and  insurance  companies  taxable 
upon  their  net  income  as  hereinafter  provided — 

you  are  informed  that  returns  of  individuals,  when  such  indi- 
viduals are  subject  to  the  normal  tax  only,  need  not  include 
the  income  derived  from  the  dividends  or  net  earnings  re- 
ferred to  above.  When  individuals  are  subject  to  the  addi- 
tional tax,  such  income  derived  from  said  dividends  or  net 
earnings  must  be  shown  on  the  return. 

Persons  having  an  annual  net  income  of  $3,000  or  more, 
including  the  income  derived  from  dividends  or  net  earnings 
of  corporations,  etc.,  but  whose  total  net  income  is  less  than 
$20,000,  and  whose  net  income,  exclusive  of  the  income  de- 
rived from  dividends  or  net  earnings  of  such  corporations, 
etc.,  is  less  than  $3,000  for  the  taxable  year  ($2,500  for  the 
year  1913),  shall  not  be  required  to  make  a  return  of  annual 
net  income. 

Returns  which  have  been  or  may  be  received  from  persons 
subject  to  the  normal  tax  only,  in  which  such  dividends  are 
included  and  deducted,  need  not  be  changed  to  meet  the  pro- 
visions of  this  regulation. 

All  previous  rulings  of  the  department,  including  the  gen- 
eral regulations  Xo.  33,  are  amended  accordingly. 


176  Federal  Income  Tax 

(T.  D.  194(5.) 

Special  assessment  districts  created  under  the  laws  of  the  several 
States  for  public  purposes,  such  as  the  improvement  of  streets 
and  public  highways,  the  provision  for  sewerage,  gas,  and  light, 
and  the  reclamation,  drainage,  or  irrigation  of  bodies  of  land, 
and  levee  and  school  districts  are  held  to  be  political  subdivi- 
sions of  a  State. 

To  collectors  of  internal  revenue: 

Referring  to  paragraph  B,  section  2,  of  the  income-tax 
law,  which  reads  as  follows : 

That  in  computing  net  income  there  shall  be  excluded  interest 
upon  the  obligations  of  a  State  or  any  political  subdivision  thereof — 

you  are  informed  that  under  date  of  January  30,  1914,  the 
honorable  the  Attorney  General  held  that  special  assessment 
districts  created  under  the  laws  of  the  several  States  for  public 
purposes,  such  as  the  improvement  of  streets  and  public  high- 
ways, the  provision  for  sewerage,  gas,  and  light,  and  the  rec- 
lamation, drainage,  or  irrigation  of  bodies  of  land  within  such 
special  assessment  districts  when  such  districts  are  for  public 
use,  are  political  subdivisions  of  the  State  within  the  mean- 
ing of  the  above  proviso. 

It  is  held  that  the  term  "'political  subdivision"  includes 
special  assessment  districts  or  divisions  of  a  State  created  by 
the  proper  authority  of  the  State  acting  within  its  constitu- 
tional powers  and  under  its  general  laws,  for  the  purpose  of 
carrying  out  a  portion  of  those  functions  of  the  State  which 
by  long  usage  and  inherent  necessities  of  government  have 
always  been  regarded  as  public. 

Levee  and  school  districts  when  lawfully  created  under  the 
authority  of  the  State  and  which  are  authorized  by  the  laws 
of  the  State  to  levy  a  tax  to  meet  the  obligations  of  such  dis- 
tricts are  also  held  to  be  political  subdivisions  of  a  State 
within  the  meaning  of  the  income-tax  law. 

The  income  derived  from  interest  upon  the  obligations  of 
all  such  public  districts  shall  therefore  be  excluded  in  com- 
puting net  income  for  the  income  tax. 

This  decision  supersedes  T.  D.  1910. 


Treasury  Department  Special  Kulings         177 

(T.  D.  1947.) 

Extending  T.  D.  1945  to  cover  returns  made  by  fiduciaries  in  their 
fiduciary  capacity. 

You  are  advised  that  the  provisions  of  T.  D.  1945 — in  mat- 
ter of  exclusion  of  dividends  or  net  earnings  of  corporations, 
joint-stock  companies  or  associations,  and  insurance  com- 
panies, by  persons  subject  to  the  normal  tax  only,  in  comput- 
ing their  net  income  for  the  taxable  year — are  extended  to 
cover  such  returns  by  fiduciaries. 

To  make  clear  any  doubt  on  the  subject,  the  provisions  of 
T.  D.  1945  are  hereby  specifically  extended  to  include  returns 
made  by  fiduciaries  as  such. 


(T.  D.  1948 — Tax-free  covenant  clause — succeeding  T.  D. 

1942.) 

This  office  is  in  receipt  of  numerous  letters  asking  whether 
income,  tax  on  which  is  paid  or  to  be  paid  at  the  source,  al- 
though not  withheld  at  the  source,  can  be  placed  in  column  A, 
page  2,  of  Form  1040,  and  in  reply  to  this  inquiry  you  will 
advise  as  follows : 

The  stipulation  in  bonds  whereby  the  tax  which  may  be 
assessed  against  them  or  the  income  therefrom  is  guaranteed, 
is  a  contract  wholly  between  the  corporation  and  the  bond- 
holder, and  in  so  far  as  the  income-tax  law  applies,  the  Gov- 
ernment will  not  differentiate  between  coupons  from  bonds 
of  this  character  and  those  from  bonds  carrying  no  such 
guaranty.  The  debtor  corporation,  or  its  duly  authorized 
withholding  agent,  will  be  held  responsible  for  the  normal 
tax  due  in  such  cases  when  no  tax  has  been  withheld  and  no 
exemption  claimed. 

Income  paid  by  "debtors"  from  March  1  to  November  1, 
1913,  shall  be  included  in  the  return  of  the  individual  (under 
column  B,  page  2,  of  Form  1040)  as  income  upon  which  the 
12 


178  Federal  Income  Tax 

normal  tax  of  1  per  cent  has  not  been  withheld  and  paid  at 
the  source.  Income  received  by  individuals  between  Novem- 
ber 1  and  December  31,  1913,  upon  which  the  normal  tax 
has  been  withheld  at  the  source  shall  be  included  in  their 
annual  return  (under  column  A,  page  2,  of  Form  1040)  as 
income  upon  which  the  tax  has  been  withheld. 


(T.  D.  1950.) 

Time  for  filing  returns  of  income,  and  penalties  in  connection 

therewith. 

You  are  advised,  and  will  so  announce  from  your  respective 
offices,  that  the  law  and  regulations  require  returns  of  in- 
come for  the  taxable  period,  March  1  to  December  31,  1913, 
to  be  made  and  filed  on  or  before  March  1,  1914.  The  law 
is  mandatory  and  allows  no  discretion  to  be  exercised  by  any 
officer.  Section  3176,  Revised  Statutes  of  the  United  States, 
as  amended  and  made  part  of  the  income-tax  law,  gives  to 
collectors  of  internal  revenue  (they  being  satisfied  as  to  the 
merits  of  the  claim,  and  in  the  reasonable  exercise  of  their 
judgment  and  discretion)  authority  to  grant  extension  of 
time  not  to  exceed  30  days  from  the  time  prescribed  by  law 
in  which  to  file  a  return  of  net  income,  and  then  only  in  cases 
where  such  failure,  neglect,  or  refusal  is  the  result  of  "sick- 
ness or  absence." 

You  are  also  advised,  and  will  so  announce,  that  there  will 
be  no  change  in  income-tax  regulations  as  they  now  exist  prior 
to  March  1,  1914,  and  that  all  persons  and  corporations  re- 
quired to  make  a  return  which  have  not  as  yet  done  so  should 
make  and  file  their  returns  at  the  earliest  opportunity  and  on 
or  before  March  1. 

Collectors  will  forward  to  this  office  immediately  a  report 
showing  the  number  of  returns  filed  in  their  respective  offices 
as  of  February  20,  1914. 


Treasury  Department  Special  Rulings         179 

Penalties  and  additional  tax,  in  connection  with  refusal  or 
neglect  to  file  return  of  income  within  the  prescribed 
timie. 

As  to  corporations. — For  neglect  or  refusal  to  make  a  re- 
turn within  the  prescribed  time,  corporations  are  liable  to  a 
penalty  not  to  exceed  $10,000 ;  and  in  case  of  neglect  or  re- 
fusal to  make,  or  for  a  false  or  fraudulent  return  made,  100 
per  cent  is  to  be  added  to  the  tax ;  and  in  the  case  of  neglect 
or  refusal  to  make  and  verify  a  return  within  the  prescribed 
time  (except  in  case  of  sickness  or  absence)  50  per  cent  is 
to  be  added  to  the  tax ;  and  in  case  of  an  officer  of  a  corpora- 
tion or  like  institution  charged  with  the  duty  and  responsi- 
bility of  making  and  verifying  a  return  who  makes  a  false 
or  fraudulent  return  with  the  intent  to  defeat  or  evade  any 
assessment  or  tax,  he  shall  be  guilty  of  a  misdemeanor,  and  be 
subject  to  a  fine  not  to  exceed  $2,000,  or  to  imprisonment  not 
to  exceed  one  year,  or  both,  at  the  discretion  of  the  court, 
together  with  costs. 

As  to  individuals. — For  neglect  or  refusal  to  make  a  return 
within  the  prescribed  time,  the  penalty  is  not  less  than  $20 
nor  more  than  $1,000 ;  and  in  case  of  intentional  neglect  or 
refusal  to  make,  or  for  a  false  or  fraudulent  return  made, 
there  shall  be  added  100  per  cent  to  the  tax;  and  in  case  of 
neglect  or  refusal  to  make  a  return  within  the  prescribed  time 
(except  in  case  of  sickness  or  absence)  there  shall  be  added 
50  per  cent  to  the  tax. 


(T.  D.  1956.) 

Inquiries  relative  to  the  income  tax  covered  by  regulations  and 
rulings  to  be  answered  by  collectors. 

To  collectors  of  internal  revenue: 

A  large  part  of  the  volume  of  correspondence  coming  to 
this  office  asking  for  information  relative  to  making  return 
and  ascertainment  of  net  income,  etc.,  for  the  income  tax,  is 


180  Federal  Income  Tax 

sufficiently  covered  by  regulations,  and  shoidd  be  answered  in 
tbe  offices  of  collectors. 

Collectors  bave  been  furnisbed  witb  copies  of  Regulations 
No.  33,  and  will  be  advised  from  time  to  time  of  additional 
rulings  in  income-tax  matters. 

Collectors  are  tberefore  advised  that  letters  coming  to  this 
office  asking  for  information  which  should  be  supplied  by 
collectors  in  accordance  with  instructions  and  regulations 
furnished  them,  will  be  referred  to  collectors  for  reply  and 
writers  of  the  letters  advised  of  the  reference.  Collectors, 
upon  receipt  of  letter  referred  to  them  by  this  office,  will  give 
immediate  attention  to  the  subject-matter  of  the  inquiry,  in 
accordance  with  the  regulations  and  instructions  bearing  upon 
the  same. 


(T.  D.  1957.) 

Partnerships  are  not  subject  to  income  tax,  but  are  required  to  file 
certificates  of  ownership  of  bonds,  etc.,  in  connection  with  cou- 
pon and  registered  interest  payments  to  prevent  withholding  of 
their  income  at  the  source. 

Referring  to  the  following  provision  in  paragraph  I)  of  the 
income-tax  law — 

That  any  persons  carrying  on  business  in  partnership  shall  be 
liable  for  income  tax  only  in  their  individual  capacity,  and  the  share 
of  the  profits  of  a  partnership  to  which  any  taxable  partner  would 
be  entitled  if  the  same  were  divided,  whether  divided  or  otherwise, 
shall  be  returned  for  taxation  and  the  tax  paid,  under  the  provisions 
of  this  section,  and  any  such  firm,  when  requested  by  the  Commis- 
sioner of  Internal  Revenue,  or  any  district  collector,  shall  forward 
to  him  a  correct  statement  of  such  profits  and  the  names  of  the  in- 
dividuals who  would  be  entitled  to  the  same,  if  distributed — 

it  is  held  that  the  income  of  partnerships  per  se  is  not  subject 
to  the  income  tax.  The  provisions  of  the  law  "relating  to  the 
deduction  and  payment  of  the  tax  at  the  source  of  income" 
do  not  apply  to  the  income  of  partnerships  as  such.  Taxable 
members  of  partnerships  will  be  required  to  account,  in  their 


Treasury  Department  Special  Rulings         181 

individual  returns,  for  their  respective  shares  or  interest  in 
the  partnership  profits,  whether  the  same  are  divided  and  dis- 
tributed or  not. 

Partnerships  owning  "bonds  and  mortgages,  or  deeds  of 
trust,  and  other  similar  obligations  of  corporations,  joint- 
stock  companies  or  associations,  and  insurance  companies," 
shall  file  certificates  of  ownership,  in  Form  1001,  evidencing 
the  fact  of  partnership  ownership  when  presenting  for  collec- 
tion or  payment  coupons  or  interest  orders  for  interest  upon 
said  obligations ;  and  when  such  certificates  are  filed,  the  tax 
on  such  interest  payments  to  partnerships  shall  not  be  with- 
held. 

The  last  sentence  in  Article  14,  page  35,  and  Article  47  of 
Income  Tax  Regulations  No.  33,  providing  for  claim  by 
partnerships  for  deduction  for  legitimate  expense  incurred 
in  conducting  the  business  of  a  partnership,  are  hereby  super- 
seded and  repealed. 


(T.  D.  1960.) 

Corporations  are  allowed  by  law  to  deduct  interest  actually  accrued 
and  paid  within  the  year  on  an  amount  not  in  excess  of  paid-up 
capital  stock  outstanding  at  the  close  of  the  year,  plus  one-half 
the  interest-bearing  indebtedness  then  also  outstanding. 

Your  attention  is  called  to  that  provision  of  the  income-tax 
law  designated  as  the  third  deduction,  subdivision  (b),  para- 
graph G,  reading  as  follows: 

The  amount  of  interest  accrued  and  paid  within  the  year  on  its 
indebtedness  to  an  amount  of  such  indebtedness  not  exceeding  one- 
half  of  the  sum  of  its  interest-bearing  indebtedness  and  its  paid-up 
capital  stock  outstanding  at  the  close  of  the  year,  and  if  no  paid-up 
capital  stock,  the  amount  of  interest  paid  within  the  year  on  an 
amount  of  its  indebtedness  not  exceeding  the  amount  of  capital  em- 
ployed in  the  business  at  the  close  of  the  year. 

It  is  held  that  in  the  case  of  a  corporation  having  capital 
stock  this  deductible  interest  is  interest  actually  accrued  and 
paid  within  the  year  on  an  amount  of  indebtedness  not  ex- 


182  Federal  Income  Tax 

ceeding  the  paid-up  capital  stock  outstanding  at  the  close  of 
the  year,  increased  by  the  addition  thereto  of  one-half  the 
interest-bearing  indebtedness  outstanding  at  the  close  of  the 
year. 

The  qualifying  phrase,  "outstanding  at  the  close  of  the 
year,"  appearing  in  the  foregoing  quotation,  is  held  to  apply 
to  both  paid-up  capital  stock  and  indebtedness,  and  "one-half 
the  sum  of"  qualifies  only  the  indebtedness,  which  indebted- 
ness, like  the  paid-up  capital  stock,  is  required  by  the  law  to 
be  reported,  in  making  return  of  annual  net  income,  as  out- 
standing at  the  close  of  the  year. 

If  no  indebtedness  is  outstanding  at  the  close  of  the  year, 
the  maximum  deduction  allowable  on  account  of  interest  paid 
will  be  the  amount  of  interest  actually  accrued  and  paid  on 
an  amount  of  indebtedness  not  exceeding  at  any  time  within 
the  year  the  entire  paid-up  capital  stock  outstanding  at  the 
close  of  the  taxable  year;  that  is,  in  such  case,  the  paid-up 
capital  stock  outstanding  at  the  close  of  the  year  measures  the 
highest  amount  of  indebtedness  upon  which  deductible  in- 
terest can  be  computed. 

For  the  purpose  of  an  allowable  deduction,  interest  on  the 
maximum  amount  of  indebtedness,  determined  in  the  man- 
ner above  indicated,  can  be  computed  upon  such  amount  only 
for  the  time  during  which  such  amount  of  indebtedness  is  not 
in  excess  of  the  paid-up  capital  stock,  increased  by  one-half 
the  sum  of  the  interest-bearing  indebtedness  outstanding  at 
the  close  of  the  year. 

In  any  event,  the  amount  of  interest,  in  order  to  constitute 
an  allowable  deduction,  must  not  only  be  within  the  limit  of 
the  law  as  herein  defined,  but  must  have  actually  accrued  and 
been  paid  within  the  year  for  which  the  return  is  made. 

In  cases  where  no  capital  stock  exists,  the  limitation  as  to 
deduction  is  confined  to  interest  actually  paid  on  an  amount 
of  indebtedness  not  exceeding  at  any  time  during  the  year 
the  capital  employed  in  the  business  at  the  close  of  the  year. 

Any  provision  in  the  regulations  heretofore  issued  incon- 
sistent with  the  foregoing  is  hereby  revoked. 


Treasury  Department  Special  Rulings         183 

(T.  D.  1961.) 

Fiduciaries. 

Forms  1015  and  1019  may  be  adapted  so  that  but  one  certificate  will 
be  required  to  be  filed  with  coupons  from  the  same  issue  of 
bonds,  the  property  of  different  estates  or  trusts. 

Under  Income  Tax  Regulations  Xo.  33,  Articles  39  and  70, 
fiduciaries  are  required  to  file  certificates  on  Form  1015  or 
Form  1019,  according  to  the  nature  of  the  claim  to  be  made 
by  the  fiduciary,  for  each  issue  of  bonds  and  for  each  trust. 

It  is  therefore  provided  that  where  fiduciaries  have  the  cus- 
tody and  control  of  more  than  one  estate  or  trust,  and  said 
estates  or  trusts  have  as  assets  bonds  of  corporations,  etc.,  of 
the  same  issue,  said  fiduciaries  may  adapt  certificates  Form 
1015  or  Form  1019  by  changing  the  words  "estate  or  trust" 
in  lines  2  and  3  of  said  forms  to  the  plural,  and  inserting  in 
the  blank  space  provided  in  line  3  of  said  forms  for  the  de- 
scription of  the  estate  or  trust  the  words  "as  noted  on  the 
back  hereof."  In  such  cases  the  notation  on  the  back  of  the 
certificate  should  show  for  each  estate  or  trust  (a)  the  name 
of  the  estate  or  trust,  (b)  the  amount  of  the  bond,  (c)  the 
amount  of  the  interest.  In  all  other  respects  the  certificates 
should  be  filled  out  as  indicated  thereon. 


(T.  D.  1962— See  T.  D.  2016.) 

Information  contained  in  income-tax  returns  to  be  treated  as 
inviolably  confidential. 

The  attention  of  collectors  of  internal  revenue,  internal- 
revenue  agents,  and  other  officers  concerned  is  invited  to  sec- 
tion 3167  of  the  United  States  Revenue  Statutes,  which  pro- 
hibits the  disclosure  of  information  contained  in  income  and 
other  returns  of  internal-revenue  taxpayers. 

All  internal-revenue  officers  will  preserve  as  inviolably  con- 
fidential all  income-tax  returns,  as  the  slightest  infraction  of 
law  upon  this  subject  will  be  severely  punished. 


184  Federal  Income  Tax 

(T.  D.  1965.) 

Advance  payment  of  tax  withheld  by  withholding  agents  not  to  be 
made  prior  to  30  days  preceding  the  date  on  which  the  annual 
return  is  required  to  be  filed. 

Attention  is  directed  to  note  A  appearing  on  the  bottom  of 
Forms  1012,  1012c,  1043,  and  1044,  providing  that- 
Withholding  agents  may,  if  they  so  desire,  pay  at  the  time  this 
list  is  filed,  to  the  collector  of  internal  revenue  with  whom  the  list 
is  filed,  the  amount  of  tax  withheld  during  the  month  for  which  the 
list  is  made, 

And  to  note  A,  Form  1042,  providing  that — 

The  amount  of  the  tax  withheld  during  the  year  for  which  the 
list  is  made  may  be  paid  to  the  collector  at  the  time  the  list  is  filed. 

In  order  that  persons  whose  income  tax  is  deducted  and 
withheld  and  is  to  be  paid  at  the  source  may  have  an  oppor- 
tunity to  file  with  the  source  which  is  required  to  withhold 
and  pay  tax  for  them  certificates  claiming  the  benefit  of  de- 
ductions and  exemptions  provided  for  in  paragraph  B  and 
allowed  in  paragraph  C  of  the  law,  withholding  agents  will 
not  pay  to  collectors  of  internal  revenue  the  tax  withheld  by 
them  under  the  law  until  after  the  time  for  filing  claims  for 
deductions  and  exemptions  has  expired.  See  Regulations  No. 
33,  Art.  33,  (a)  and  (b). 


(T.  D.  1967— See  Page  297.) 

Organizations,  etc.,  exempted  by  the  first  proviso  of  paragraph  G 
of  section  2  of  the  act  of  October  3,  1913,  from  payment  of  the 
income  tax  are  not  subject  to  the  provisions  of  the  income-tax 
law  as  withholding  agents. 

This  office  is  in  receipt  of  several  communications  relative 
to  the  duty  as  withholding  agents  of  religious  corporations 
and  other  organizations  which  are  specifically  enumerated  in 
the  first  proviso  of  paragraph  G  of  section  2  of  the  act  of 
October  3,  1913. 

The  language  of  said  proviso  is  as  follows : 


Treasury  Department  Special  Rulings         185 

That  nothing  in  this  section  shall  apply  to  labor,  agricultural,  or 
horticultural  organizations,  or  to  mutual  savings  banks  not  having 
a  capital  stock  represented  by  shares,  or  to  fraternal  beneficiary 
societies,  orders,  or  associations  operating  under  the  lodge  system 
or  for  the  exclusive  benefit  of  the  members  of  a  fraternity  itself 
operating  under  the  lodge  system,  and  providing  for  the  payment  of 
life,  sick,  accident,  and  other  benefits  to  the  members  of  such  socie- 
ties, orders,  or  associations  and  dependents  of  such  members;  nor 
to  domestic  building  and  loan  associations;  nor  to  cemetery  com- 
panies, organized  and  operated  exclusively  for  the  mutual  benefit  of 
their  members;  nor  to  any  corporation  or  association  organized  and 
operated  exclusively  for  religious,  charitable,  scientific,  or  educa- 
tional purposes,  no  part  of  the  net  income  of  which  inures  to  the 
benefit  of  any  private  stockholder  or  individual;  nor  to  business 
leagues;  nor  to  chambers  of  commerce  or  boards  of  trade,  not  organ- 
ized for  profit  or  no  part  of  the  net  income  of  which  inures  to  the 
benefit  of  the  private  stockholder  or  individual,  nor  to  any  civic 
league  or  organization  not  organized  for  profit  but  operated  exclu- 
sively for  the  promotion  of  social  welfare. 

You  are  therefore  advised  that  the  words  "this  section"  are 
held  to  refer  to  and  mean  the  whole  of  section  2  of  the  act  of 
October  3,  1913,.  which  section  comprises  the  income-tax  law, 
and  that  the  words  "nothing  in  this  section  shall  apply  to" 
were  intended  to  relieve  such  organizations,  etc.,  as  properly 
come  within  the  classifications  referred  to  in  the  proviso 
quoted,  not  only  from  the  payment  of  an  income  tax  but  from 
every  obligation  or  requirement  imposed  by  any  or  all  of  the 
provisions  of  said  section  upon  withholding  agents. 


(T.  D.  1973.) 

Revision  of  Form  1044,  monthly  list  return  of  amount  of  normal  in- 
come tax  withheld  by  first  bank  or  collecting  agency. 

Collectors  are  hereby  advised  that  Form  1044,  for  monthly 
list  return  of  amount  of  normal  tax  withheld  by  first  bank  or 
collecting  agency,  has  been  revised  in  the  following  particu- 


186  Federal  Income  Tax 

lars,  so  that  the  tax  withheld  from  interest  on  bonds  of  differ- 
ent classes  or  of  more  than  one  organization  can  be  reported 
thereon : 

In  the  section  of  reading  matter  beginning,  "To  be  made  in 
duplicate,''  in  the  fourth  line  thereof,  change  "coupon"  to 
"coupons,"  and  strike  out  "and  interest  orders." 

In  the  last  line,  next  above  the  tabular  list,  strike  out  the 
blank  lines  and  the  words  thereunder,  "Describe  the  particu- 
lar issue  of  bonds,"  and  "State  name  and  address  of  debtor 
organization." 

Strike  out  the  headings  in  the  tabular  list  and  substitute 
therefor,  in  separate  columns,  "Party  presenting  coupons," 
and  immediately  thereunder,  in  separate  columns,  "Name" 
and  "Address,"  "Name  of  debtor  corporation,"  "Name  of 
particular  issue  of  bonds,"  "Amount  of  income  subject  to 
tax,"  and  "Amount  of  tax  withheld." 

Immediately  after  and  under  the  line  of  totals  of  the  tabu- 
lar list  there  shall  be  a  double  rule  line.  Strike  out  the  words 
now  appearing  below  the  total  line  of  the  tabular  list  on  Form 
1044,  viz.,  "Amount  of  tax  remitted  herewith  (if  any)  to  col- 
lector," and  strike  out  the  dotted  line  following  these  words, 
and  also  the  dollar  mark  on  the  same  line,  and  strike  out  the 
double  rule  line  appearing  immediately  thereunder. 

Strike  out  all  of  note  A  appearing  at  the  bottom  of  the 
form. 


(T.  L>.  1974.) 

Change  of  regulations  as  to  certificates  of  ownership  in  connection 
with  interest  orders  or  checks  for  interest  on  registered  bonds. 

Articles  41  to  46  of  the  Regulations  are  hereby  amended 
so  as  to  require,  in  the  case  of  interest  payments  on  bonds 
registered  as  to  both  principal  and  interest,  that  debtors  in 
such  cases  shall  deduct  the  normal  tax  of  1  per  cent  from 
accruing  interest  on  all  such  bonds  before  sending  out  orders 
or  checks  for  said  interest  to  registered  owners,  unless  there 


Treasury  Department  Special  Rulings         187 

shall  be  filed  with  said  debtors,  at  least  five  days  before  the 
due  date  of  said  interest,  the  prescribed  certificates  claiming 
exemption. 

Where  such  certificates  are  so  filed  the  said  debtors  shall 
stamp  or  write  on  the  interest  orders  or  checks,  as  the  case 
may  be,  "Exemption  claimed  by  certificate  filed  with  debtor." 

Where  prescribed  certificates  are  not  so  filed,  said  debtor 
shall  deduct  and  withhold  the  normal  tax  of  1  per  cent  from 
the  amount  of  such  payment,  and  shall  stamp  or  write  on  the 
interest  order  or  check,  as  the  case  may  be,  "Income  tax  with- 
held by  debtor." 

Responsible  banks,  bankers,  or  collecting  agents  receiving 
for  collection  interest  orders  or  checks  bearing  the  aforesaid 
indorsements  may  present  said  interest  orders  or  checks  for 
collection  without  requiring  that  certificates  of  ownership  be 
filed  therewith. 

Certificates  of  ownership  are  not  required  to  accompany  in- 
terest orders  or  checks  in  payment  of  interest  on  fully  regis- 
tered bonds,  as  information  as  to  ownership  of  bonds  will  be 
furnished  by  debtor  organizations  on  monthly  list  returns, 
Form  1012 ;  but  claim  for  exemption  must  be  filed  with 
debtors,  or  the  tax  must  be  withheld ;  and  the  form  of  certifi- 
cate provided  for  use  of  owners  of  coupon  bonds  may  be  used 
by  owners  of  registered  bonds  for  the  purpose  of  claiming  this 
exemption. 

Where,  because  of  failure  to  file  certificates  claiming  ex- 
emption, in  compliance  with  above  regulations,  a  part  of  the 
income  from  interest  on  registered  bonds  has  been  withheld 
for  the  payment  of  the  normal  income  tax,  debtors  may,  upon 
the  filing  of  the  proper  certificates  as  provided  in  Article  42, 
Income  Tax  Regulations,  to  the  extent  of  exemption  claimed, 
release  and  pay  to  the  persons  entitled  thereto  the  amount  of 
such  income  so  withheld. 


188 


Federal  Income  Tax 


(T.  D.  1976— See  1998.) 

Supplemental  regulations  prescribing  revised  forms  of  certificates 
of  ownership,  exemption,  and  substitute  certificates  in  lieu  of 
such  certificates  now  in  use. 

The  following  certificates  are  prescribed  in  lieu  of  certifi- 
cates now  in  use,  and  are  to  be  used  in  complying  with  the 
income-tax  regulations  requiring  the  filing  of  certificates  when 
presenting  coupons  or  interest  orders  for  collection : 

Revised  Form  1000. 
Ownership   Certificate—  Individual— EXEMPTION   NOT   CLAIMED. 

shall  be  in  the  following  form  and  shall  be  printed  on  white 
paper : 
Form 


1000. 
Revised. 


I 

a 

o 

0 

SB 


m 
a 

g 

< 

s 


Ownership  Certificate — Individual — Exemption  not  Claimed. 
(To  be  furnished  with  coupons  or  interest  orders  showing  ownership  of  bonds.) 


(Give  name  of  debtor.) 


(Full  description  of  bonds,  giving  name  of  issue  and  interest  rate.) 
191.. 


(Date  of  maturity  of  interest.) 

Amount  of  coupon  or  registered  interest,  $ 

I  do  solemnly  declare  that  I  am  a  citizen  or  resident  of 
the  United  States  and  am  the  owner  of  the  above-described 
bonds  from  which  were  detached  the  accompanying  coupons, 
or  from  which  I  am  entitled  to  the  above-described  regis- 
tered interest,  and  that  all  of  the  information  as  given  in 
this  certificate  is  true  and  correct.  I  do  not  now  claim  ex- 
emption from  having  the  normal  tax  of  1  per  cent  withheld 
from  said  income  by  the  debtor  at  the  source. 

Date, ,191 

(Usual  business  signature  of  owner 
•Note  1. — To  be  filled  in  only  of  bonds.) 
when  duly  authorized  agent  exe- 
cutes this  certificate  for  owner,  in 
which  case  the  name  and  address 
of  owner  must  be  given  and  col- 
lecting agent  first  receiving  certifi- 
cate must  stamp  across  face,  "Sat- 
isfied as  to  identity  and  responsi- 
bility of  agent"  (giving  name  and  "O+By Agent 


(Full  post-office  address  of  owner.) 


(Usual  business  signature  of  agent 
authorized  to  sign  for  owner.) 


address  of  collecting  agent) 

Note  2. — If  securities  are  owned 
jointly  by  several  persons  one  may 
sign,  and  the  names,  addresses,  and 
proportion  of  ownership  of  each 
indorsed  on  the  back  hereof. 

Note  3. — When  numbers  of  bonds  _ _ 

are  required  to  be  given,  same  are  (Full  post-office  address  of  agent.) 

to  be  entered  on  back  hereof. 

(SIGNATURES  MUST  BE  CLEARLY  AND  LEGIBLY  WRITTEN.) 


Treasury  Department  Special  Rulings 


189 


On  the  back  of  said  certificate  there  shall  be  printed,  for 
the  use  of  joint  owners  of  bonds,  the  following  form,  to  wit: 

JOINT   OWNEBS. 

If  securities  described  on  other  side  are  owned  jointly,  the  names 
and  addresses  of  owners  and  the  proportion  of  ownership  of  each 
should  he  given. 


Names 

Full  Post-office  Addresses 

Proportion  Owned 

Revised  Form  1000  B. 
Ownership  Certificate— Individual— EXEMPTION  CLAIMED. 

shall  be  in  the  following  form,  and  shall  be  printed  on  yellow 
paper : 


Form 
1000  B. 
Revised. 


CM 
H 
Q 

& 

P 

CD 

< 

m 
S 

H 


Ownership  Certificate— Individual — Exemption  Claimed. 

(To  be  furnished  with  coupons  or  interest  orders  showing  ownership  of  bonds 

and  amount  of  exemption  claimed  under  paragraph  C  of  the  Federal 

income  tax  law.) 


(Give  name  of  debtor.) 


(Full  description  of  bonds,  giving  name  of  issue  and  interest  rate.) 

,  191 

(Date  of  maturity  of  interest.) 

Amount  of  coupon  or  registered  interest,  $ 

Total  exemption  allowed  under  paragraph  C,  $ 

Amount  of  exemption  now  claimed,  $ 

I  do  solemnly  declare  that  I  am  a  citizen  or  resident  of 
the  United  States  and  am  the  owner  of  the  above-described 
bonds  from  which  were  detached  the  accompanying  coupons, 
or  from  which  I  am  entitled  to  the  above-described  regis- 
tered interest,  and  that  all  of  the  information  as  given  in 
this  certificate  is  true  and  correct. 

Date, ,191 

_,.-„-.        ,       ,  (Usual  business  signature  of  owner 

•Note  1.— To  be  filled  in  only  when  0f  bonds.) 

duly  authorized  agent  executes  this 
certificate  for  owner,  in  which  case 
the  name  and  address  of  owner 
must  be  given,  and  collecting  agent 
first  receiving  certificate  must  stamp 
across  face, "Satisfied  as  to  identity 
and  responsibility  of  agent"  (giv- 
ing name  and  address  of  collecting 
agent). 

Note  2.— If  securities  are  owned 
jointly  by  several  persons  one  may 
sign,  and  the  names,  addresses,  and 
proportion  of  ownership  of  each  in- 
dorsed on  the  back  hereof. 

Note  3. — When  numbers  of  bonds 
are  required  to  be  given,  same  are 
to  be  entered  on  back  hereof. 

(SIGNATURES  MUST  BE  CLEARLY  AND  LEGIBLY  WRITTEN.) 


(Full  post-office  address  of  owner.) 


-®a*By Agent. 

(Usual  business  signature  of  agent 
authorized  to  sign  for  owner.) 


(Full  post-office  address  of  agent.) 


190 


Federal  Income  Tax 


On  the  back  of  said  certificate  there  shall  be  printed,  for 
the  use  of  joint  owners  of  bonds,  the  following  form,  to  wit: 

JOINT   OWNERS. 

If  securities  described  on  other  side  are  owned  jointly,  the  names 
and  addresses  of  owners  and  the  proportion  of  ownership  of  each 
should  be  given. 


Names 

Full  Post-office  Addresses 

Proportion  Owned 

Revised  Form  1001. 
Ownership  Certificate— FIRMS  AND  ORGANIZATIONS. 

shall  be  in  the  following  form,  and  shall  be  printed  on  yellow 
paper : 
Form 


1001. 

Revised. 


3     1 


Ownership  Certificate — Firms  and  Organizations. 
(Showing  ownership  of  bonds,  which  is  to  be  furnished  by  firms  or  organiza- 
tions not  subject  to  withholding  of  tax  on  interest  at  source.) 


(Give  name  of  debtor.) 


(Full  description  of  bonds,  giving  name  of  issue  and  interest  rate.) 
,  191 

(Date  of  maturity  of  interest.) 

Amount  of  coupon  or  registered  interest,  $ 

I  do  solemnly  declare  that  the  firm  or  organization 
named  below,  and  of  which  I  am  a  member  or  an  officer,  is 
the  owner  of  the  above-described  bonds  from  which  were 
detached  the  accompanying  coupons,  or  upon  which  there 
is  due  the  above-described  registered  interest,  and  that 
under  the  provisions  of  the  Income  Tax  Law  and  Regula- 
tions said  interest  is  exempt  from  having  the  tax  withheld 
at  the  source,  and  that  all  the  information  given  herein  is 
true  and  correct. 

Date ,191 


(Name  of  firm  or  organization.) 


By 

(Signature  of  person  duly  author- 
ized to  sign,  and  his  official 
position.) 

Address: 

(Give  full  post-office  address  of  firm 
or  organization.) 
Note. — When  numbers  of  bonds  are  required  to  be  given,  same  are  to  be 
entered  on  back  hereof. 


Treasury  Department  Special  Rulings 


191 


Revised  Form  1002. 

CERTIFICATE    FOR    USE    OF    FIRST    BANK    OR    COLLECTING 

AGENCY. 


shall  be  in  the  following  form,  and  shall  he  printed  on  green 
paper : 

Form  Certificate  of  Bank  or  Collecting  Agency. 

Revised.      (To  be  presented  with  coupons  or  interest  orders  when  not  accompanied  by 

certificates  of  owners.) 


X 
■< 
H 

W 
S 

z 
o 


(Give  name  of  debtor.) 


(Full  description  of  bonds,  giving  name  of  issue  and  interest  rate.) 


,  191 

(Date  of  maturity  of  interest.) 


Amount  of  coupon  or  registered  interest,  $ 

I  (we)  do  solemnly  declare  that  the  bank  or  collecting 
agency  named  below  has  purchased  or  accepted  for  collec- 
tion   the   accompanying   coupons   or    interest    orders   from 

: ,  of and 

(Name  of  party  from  whom  received.)   (Full  post-office  address  of  said  party.) 

that  no  certificate  of  ownership  accompanied  said  coupons 
or  interest  orders,  and  that  I  (we)  have  no  knowledge  as 
to  who  is  the  owner  or  owners  of  the  bonds  (except  as 
noted  on  back  hereof)*  upon  which  the  above-described  in- 
terest is  due,  and  the  bank  or  collecting  agency  hereby 
acknowledges  responsibility  of  withholding  therefrom  the 
normal  income  tax  of  1  per  cent,  in  accordance  with  the 
regulations  of  the  Treasury  Department. 


Date, ,  191.. 


(Bank  or  collecting  agency.) 


By 

(Signature  of  officer  authorized  to  sign,  and  official  position.) 


(Full  address  of  bank  or  withholding  agency.) 

•Note. — If  the  ownership  of  bonds  is  known  to  person  signing  this  certifi- 
cate, he  must  give  the  name  and  address  of  the  owner  on  the  back  hereof. 

(SIGNATURES  MUST  BE  CLEARLY  AND  LEGIBLY  WRITTEN.) 


192 


Federal  Income  Tax 


Revised  Form  1004. 
Ownership  Certificate— NONRESIDENT  ALIENS. 


shall  ho  in  the  following  form,  and  shall  be  printed  on  yellow 
paper : 

Form  Ownerbhip  Certificate — Nonresident  Aliens. 

1004. 

Revised.  (To  De  furnished  with  coupons  detached  from  bond9  or  other  obligations  owned 
by  citizens  or  subjects,  firms,  corporations,  or  organizations  of  foreign  coun- 
tries and  who  are  not  residents  of  the  United  StateB.) 


< 

H 

§ 

o 
o 

z 


a. 

Q 

« 

5 


►a 
< 

H 


(Give  name  of  debtor.) 


(Full  description  of  bonds,  giving  name  of  issue  and  interest  rate.) 


191.. 


(Date  of  maturity  of  interest.) 

Amount  of  coupon  or  registered  interest,  % 

I  do  solemnly  declare  that  the  owner  of  the  bonds  from 
which  were  detached  the  accompanying  coupons,  or  upon 
which  there  matured  the  aforesaid  registered  interest,  is  a 
nonresident  alien  in  respect  to  the  United  States,  and  is 
exempt  from  the  income  tax  imposed  on  such  income  by 
the  United  States  Government  under  the  law  enacted  Octo- 
ber 3,  1913;  that  no  citizen  of  the  United  States  wherever 
residing,  or  foreigner  residing  in  the  United  States  or  in 
any  of  its  possessions,  has  any  interest  in  said  bonds;  and 
that  all  of  the  information  as  given  in  this  certificate  is 
true  and  correct. 


Date,.. 


191.. 


(Signature  of  owner  or,  if  organiza- 
tion, name.) 


(If  organization,  signature  of  offi- 
cial authorized  to  sign,  and 
official  position.) 


(Full  post-office  address  of  owner.) 


Note. — When  numbers  of  bonds  are  required  to  be  given,  same  are  to  be  en- 
tered on  back  hereof.) 

(SIGNATURES  MUST  BE  CLEARLY  AND  LEGIBLY  WRITTEN.) 


Treasury  Department  Special  Rulings 


193 


Revised  Form  1007. 
CERTIFICATE    CLAIMING    EXEMPTION. 

allowed  citizens  and  resident  aliens  under  paragraph  C,  shall 
be  in  the  following  form,  and  shall  be  printed  on  yellow 
paper : 


Form 
1007. 

Revised. 


H 
Z 

s 

E-i 

Ph 
W 
Q 

!* 


o 
u 

7 

5 
z 
w 

3 

M 

a 

H 
V. 


Exemption  Certificate- 


(For  claiming  exemption  at  the  source  as  provided  in  paragraph  C  of  the 
Federal  income  tax  law  of  October  3,  1913.) 


To.. 


(Give  name  of  withholding  agent.) 


(Full  post-office  address.) 


I  hereby  serve  you  with  notice  that  I  am  single — married, 
with  my   (wife — husband)   living  with  me,  and  that  I  now 

claim  the  benefit  of  the  exemption  of  $ ,  as  allowed 

in  paragraph  C  of  the  Federal  Income  Tax  Law  of  October 
3,  1913  (my  total  exemption  under  said  paragraph  being 
f ). 


Date.. 


.,191...       Signed:. 


Address:. 


(Full  post-office  address.) 


Note. — Claim  for  exemption  on  Form  1007  can  be  filed  with  the  debtor  or 
withholding  agent  at  any  time,  not  less  than  30  days  prior  to  March  first 
next  succeeding  the  year  for  which  exemption  is  claimed. 

(SIGNATURES  MUST  BE  CLEARLY  AND  LEGIBLY  WRITTEN.) 


13 


194 


Federal  Income  Tax 


Revised  Form  1015. 
Ownership   Certificate— FIDUCIARY,   THE    SOURCE. 

shall  be  in  the  following  form,  and  shall  be  printed  on  yellow 
paper : 
Form 


1015. 
Revised. 


►4 

z   s 

w   o 


3 

H 

Q 

& 

P 
00 

«« 
3 


Ownership  Certificate — Fiduciary,  The  Source. 

(To  be  filed  with  debtor  or  withholding  agents  by  fiduciaries  claiming 
exemption  from  withholding  at  the  source.) 


(Give  name  of  debtor.) 


(Full  description  of  bonds,  giving  name  of  issue  and  interest  rate.) 


,191.... 

(Date  of  maturity  of  interest.) 


Amount  ot  coupon  or  registered  interest,  $ 

I  (we)  do  solemnly  declare  that  the  estate  or  trust  named 
below  is  the  owner  of  the  above-described  bonds  from  which 
were  detached  the  accompanying  coupons,  or  upon  which 
there  is  due  the  above-described  registered  interest,  and 
acting  for  the  estate  or  trust  in  the  capacity  herein  stated, 
I  (we)  hereby  declare  that  I  (we)  do  now  claim  exemption 
from  having  the  normal  tax  of  1  per  cent  withheld  from 
said  income  by  the  debtor  at  the  source.  I  (we)  hereby 
assume  the  duty  and  responsibility,  imposed  upon  with- 
holding agents  under  the  law,  of  withholding  and  paying 
the  income  tax  due   for  which  I  (we)  may  be  liable. 


Date.. 


(Name  of  fiduciary.)         (Capacity  in  which  acting.) 

...,191....         For : 


(Name  of  estate  or  trust.) 


(Full  post-office  address.) 


Note. — When  numbers  of  bonds  are  required  to  be  given,  same  are  to  be  en- 
tered on  the  back  hereof. 

(SIGNATURES  MUST  BE  CLEARLY  AND  LEGIBLY  WRITTEN.) 


Treasury  Department  Special  Rulings 


195 


Revised  Form  1019. 
Certificate  of  Ownership— FIDUCIARY,  NOT  SOURCE. 

shall  be  in  the  following  form,  and  shall  be  printed  on  white 
paper : 

Ownership  Certificate — Fiduciary,  Not  Source. 


Form 
1019. 

Revised. 


Z 
S 

m 

a 


g 

s 

O 
O 

z 


(To  be  filed  with  debtor  or  withholding  agents  by  fiduciaries  when  not  claim- 
ing any  exemption,  as  an  alternative  to  the  filing  of  Form  No.  1015  in  which 
exemption  is  claimed.) 


(Give  name  of  debtor.) 


(Full  description  of  bonds,  giving  name  of  issue  and  interest  rate.) 


,191.... 

(Date  of  maturity  of  interest.) 


Amount  of  coupon  or  registered  interest,  $ 

I  (we)  do  solemnly  declare  that  the  estate  or  trust  named 
below  is  the  owner  of  the  above-described  bonds  from  which 
were  detached  the  accompanying  coupons,  or  upon  which 
there  is  due  the  above-described  registered  interest,  and 
acting  for  the  estate  or  trust  in  the  capacity  herein  stated, 
I  (we)  hereby  declare  that  I  (we)  do  not  now  claim  ex- 
emption from  having  the  normal  tax  of  1  per  cent  withheld 
from  said  income  by  the  debtor  at  the  source. 


Date.. 


(Name  of  fiduciary.)            (Capacity  in  which  acting.) 
,191....         For 


(Name  of  estate  or  trust.) 


(Full  post-office  address.) 


Note. — When  numbers  of  bonds  are  required  to  be  given,  same  are  to  be  en* 
tered  on  the  back  hereof. 

(SIGNATURES  MUST  BE  CLEARLY  AND  LEGIBLY  WRITTEN.) 


196 


Federal  Income  Tax 


Form  1058. 
Substitute  Certificate— EXEMPTION  CLAIMED. 

shall  be  in  the  following  form,  and  shall  be  printed  on  yellow 
paper: 
Form 


1058. 


Z 


5  X 


Q 

El 

D 

OS 

<! 
H 

i- 


Substitute  Certificate — Exemption  Claimed. 

(To  be  attached  to  interest  coupons  when  the  collecting  agent's  certificate  ia 
substituted  for  the  certificate  of  owner  in  which  exemption  was  claimed.) 


(Give  name  of  debtor.) 


(Full  description  of  bonds,  giving  names  of  issue  and  interest  rate.) 


,191.... 

(Date  of  maturity  of  interest.) 


Amount  of  coupon  or  registered  interest,  $ 

Total  exemption  allowed  under  paragraph  C,  $ 

Amount  of  exemption  claimed,  $ 

I  (we)  do  solemnly  declare  that  the  owner  of  the  above- 
described  bonds  from  which  were  detached  the  accompany- 
ing interest  coupons  has  filed  with  me  (us)  a  certificate  of 

ownership,  Form  No ,  duly  executed   and  filled  in 

according  to  Treasury  Regulations,  which  certificate  has 
been  indorsed  by  me  (us)  as  required  by  Treasury  Regula- 
tions, and  that  under  the  provisions  of  the  income  tax  law 
and  regulations,  said  interest  is  exempt  from  the  withhold- 
ing and  payment  of  the  income  tax  at  the  source,  or  that 
exemption  was  claimed  as  stated  herein;  and  I  (we)  do 
hereby  promise  and  pledge  myself  (ourselves)  to  forward 
the  said  certificate  to  the  Commissioner  of  Internal  Reve- 
nue, at  Washington,  D.  C,  not  later  than  the  20th  day  of 
next  month,  in  accordance  with  Treasury  Regulations. 

Date 191.... 

By 


No.. 


(Name  of  bank  or  collecting  agency.) 
(Signature  of  person  authorized  to  sign,  and  his  official  position.) 
(Full  post-office  address  of  collecting  agency.) 


Treasury  Department  Special  Rulings 

Form  1059. 

Substitute   Certificate— EXEMPTION   NOT   CLAIMED. 


197 


shall  be  in  the  following  form,  and  shall  be  printed  on  white 
paper : 


Form 
1059. 


H 
v, 

9 

< 

H 
P 


SOBSTITTJTB  CERTIFICATE— EXEMPTION    NOT  CLAIMED. 

(To  be  attached  to  interest  coupons  when  collecting  agent's  certificate  is  sub- 
stituted for  certificate  of  owner  in  which  exemption  was  not  claimed.) 


(Give  name  of  debtor.) 


(Full  description  of  bonds,  giving  name  of  issue  and  interest  rate.) 


,191.... 

(Date  of  maturity  of  interest.) 


Amount  of  coupon  or  registered  interest,  % 

I  (we)  do  solemnly  declare  that  the  owner  of  the  above- 
described  bonds  from  which  were  detached  the  accompany- 
ing coupons  has  filed  with  me  (us)  a  certificate  of  owner- 
ship, Form  No ,  duly  executed  and  filled  in  according 

to  Treasury  Regulations,  which  certificate  has  been  indorsed 
by  me  (us)  as  required  by  Treasury  Regulations,  and  which 
certificate  did  not  claim  any  exemption  from  having  the 
normal  tax  of  1  per  cent  withheld  by  the  debtor  at  the 
source;  and  I  (we)  do  hereby  promise  and  pledge  myself 
(ourselves)  to  forward  the  said  certificate  to  the  Commis- 
sioner of  Internal  Revenue,  at  Washington,  D.  C,  not  later 
than  the  20th  day  of  next  month,  in  accordance  with  Treas- 
ury Regulations. 


Date.. 


191.. 


(Name  of  bank  or  collecting  agency.) 


By 

(Signature  of  person  authorized  to  sign, 
and  his  official  position.) 


No.. 


(Full  post-office  address  of  collecting  agency.) 

All  certificates  shall  be,  in  size,  8  by  3^  inches,  and  shall 
be  printed  to  read  from  left  to  right  along  the  8-inch  dimen- 
sion. 


198  Federal  Income  Tax 

All  certificates  claiming  exemption  shall  be  printed  on  yel- 
low paper;  all  certificates  not  claiming  exemption  shall  be 
printed  on  white  paper;  and  certificate  Form  1002,  for  use 
by  the  first  bank  or  collecting  agency,  shall  be  printed  on 
green  paper. 

All  paper  upon  which  certificates  shall  be  printed  shall  cor- 
respond in  weight  and  texture  to  white  writing  paper  21  by 
32,  about  40  pounds  to  the  ream  of  500  sheets. 

Certificates  heretofore  authorized,  when  properly  executed, 
will  be  accepted  up  to  October  1,  1914. 

The  revised  certificates  hereby  provided  will  be  printed  by 
the  Government  and  furnished  without  cost  for  the  use  of 
bond  owners. 

All  existing  regulations  which  may  be  in  conflict  with  the 
prescriptions  of  this  regulation  are  hereby  superseded. 

individuals  or  organizations  desiring  to  print  their  own 
certificates  may  do  so,  but  certificates  so  printed  must  con- 
form in  size  and  be  printed  in  similar  type,  upon  the  same 
color,  shade,  and  weight  of  paper  as  used  by  the  Government. 

W.    H.    OSBOEN, 

Approved :  Commissioner  of  Internal  Revenue. 

W.  G.  McAdoo, 

Secretary  of  the  Treasury. 


(T.  D.  1977.) 

Ownership  certificate  to  be  executed  by  foreign  banks,  bankers,  etc., 
claiming  exemption  of  nonresident  alien  from  income  tax  on  in- 
terest on  bonds  owned  by  said  nonresident  alien,  viz.,  citizens 
or  subjects,  firms,  corporations,  or  organizations  of  foreign  coun- 
tries who  are  not  residents  of  the  United  States. 

For  the  purpose  of  complying  with  income-tax  regulations 
requiring  the  filing  of  certificates  of  ownership  of  bonds  when 
presenting  coupons  or  interest  orders  for  collection  of  interest 

1Note. — Sample  certiBcates  showing  size  of  type  and  color  of  paper  can  be  secured 
from  collectors  of  internal  revenue  in  their  several  districts  or  from  the  Commissioner  of 
Internal  Revenue  at  Washington,  D.  C. 


Treasury  Department  Special  Rulings 


199 


on  bonds  of  domestic  corporations  of  the  United  States  owned 
by  nonresident  aliens  as  to  the  United  States,  a  certificate  in 
the  form  following  is  provided,  which  may  be  executed  by 
responsible  banks  or  bankers  in  foreign  countries  for  and  in 
behalf  of  nonresident  alien  owners  of  bonds  of  United  States 
corporations : 


Form 
1060. 


3 

Z    § 
W     O 

s  o 

5    2 
5     T 

£   B 
w   5 

i 

2 


Ownership  Certificate— Nonresident  Alien— To  be  Execcted 
by  Banks,  Bankers,  Etc. 

{For  use  by  foreign  banks  or  bankers,  to  accompany  coupons  detached  from 
bonds  or  other  obligations  owned  by  citizens  or  subjects,  firms,  corpora- 
tions, or  organizations  of  foreign  countries,  and  who  are  not  residents  of 
the  United  States.) 


(Give  name  of  debtor.) 


(Full  description  of  bonds,  giving  name  of  issue  and  interest  rate.) 

191 Amount  of  coupon  or  registered  interest,  $ 

(Date  of  maturity  of  interest.) 

I  (we)  do  solemnly  declare  that  the  owners  of  the  bonds  from  which  were 
detached  the  accompanying  coupons  or  upon  which  there  matured  the  afore- 
said registered  interest  are  nonresident  aliens  as  to  the  United  States  and  are 
exempt  from  the  income  tax  imposed  on  such  income  by  the  United  States 
Government  under  the  law  enacted  October  3,  1913;  that  no  citizen  of  the 
United  States,  wherever  residing,  or  foreigner  residing  in  the  United  States  or 
in  any  of  its  possessions,  has  any  interest  in  said  bonds;  and  that  all  of  the  in- 
formation as  given  in  this  certificate  is  true  and  correct.  I  (we)  hereby  agree 
that  if  at  any  time  within  three  years  from  the  date  of  this  certificate  it  shall 
appear  that  the  income  or  any  part  thereof  represented  or  covered  by  this 
certificate  was  or  is  subject  to  the  normal  tax  imposed  by  the  United  States, 
upon  presentation  of  proof  of  that  fact  to  me  (us)  by,  from,  or  through  the 
Commissioner  of  Internal  Revenue,  Washington,  D.  C,  I  (we)  will  pay  and  re- 
mit to  the  United  States  Government  the  amount  of  tax  claimed  to  be  due; 
and  I  (we)  hereby  further  agree  that  whenever  in  the  judgment  of  the  Com- 
missioner of  Internal  Revenue  it  shall  be  necessary  in  or  to  the  administration 
of  the  income  tax  law,  I  (we)  will,  upon  request  of  the  said  Commissioner  of 
Internal  Revenue,  disclose  and  furnish  to  him  the  names  and  addresses  of  the 
owners  and  the  amounts  of  the  bonds  aforesaid. 


Date, 


.,  191.. 


(Name  of  bank  or  banker.) 


By_ -— - 

(Signature  of  official  authorized  to  sign.) 


(Official  position.) 


(Full  post-office  address  of  bank  or  banker.) 

Note. — When  numbers  of  bonds  are  required  to  be  given,  same  are  to  be  en- 
tered on  back  hereof. 

(SIGNATURES  MUST  BE  CLEARLY  AND  LEGIBLY  WRITTEN.) 


When  foreign  banks  or  bankers  shall  use  the  foregoing  cer- 
tificate, they  may  include  in  one  certificate  all  the  coupons 
from  bonds  of  the  same  class  and  same  issue,  and  may  include 


200  Federal  Income  Tax 

in  one  certificate  all  the  interest  orders  or  checks  for  interest 
on  registered  bonds  of  the  same  class  and  same  issue. 

The  above  certificate  shall  be  in  size  8  by  3}  inches,  and 
shall  be  printed  to  read  from  left  to  right  along  the  8-inch 
dimension. 

The  certificate  shall  be  printed  on  yellow  paper  and  such 
paper  shall  correspond  in  weight  and  texture  to  white  writing 
paper  21  by  32,  about  40  pounds  to  the  ream  of  500  sheets. 

The  revised  certificate  hereby  authorized  will  be  printed 
by  the  Government  and  furnished  without  cost. 

Individuals  or  organizations  desiring  to  furnish  their  own 
certificates  may  do  so,  but  certificates  so  printed  must  con- 
form in  size  to  that  prescribed  above  and  be  printed  in  similar 
type  upon  the  same  color,  shade,  and  weight  of  paper  as  used 
by  the  Government. 

Sample  certificates  showing  size  of  type  and  color  of  paper 
can  be  secured  from  collectors  of  internal  revenue  in  their 
several  districts,  or  from  the  Commissioner  of  Internal 
Revenue,  Washington,  D.  C. 


(T.  D.  1986.) 

Execution   of   income  tax  substitute  certificates   1058   and   1059   by 
banks  or  collecting  agents. 

You  are  advised  that  as  a  convenience  to  banks  and  collect- 
ing agents  who  desire  to  substitute  their  certificates,  Forms 
1058  and  1059,  for  the  owner's  certificate  accompanying  the 
coupons  deposited  for  collection,  it  is  hereby  provided  that 
the  name  of  the  bank  or  collecting  agent  may  be  printed  or 
stamped,  and  that  a  facsimile  of  the  signature  of  the  person 
authorized  to  sign  the  substitute  certificate  for  the  bank  or 
collecting  agent  may  also  be  printed  or  stamped  on  the  certifi- 
cate: Provided,  that  in  all  cases  the  bank  shall  first  file  with 
the  Commissioner  of  Internal  Revenue  a  certificate  of  its  au- 
thorization in  substantially  the  form  following: 


Treasury  Department  Special  Kulings         201 


(City.)  (Date.) 

The  Commissioner  of  Internal  Revenue. 

Washington,  D.  C. 
The  undersigned  hereby  authorizes  the  use  of  the  facsimile  signa- 
ture shown  below  upon  all  substitute  income  tax  certificates  issued 
in  its  name  until  this  authorization  is  revoked  by  written  notice  to 
you. 

(Name  of  bank  or  collecting  agent.) 

By 

(Signature  of  person  authorized  to  sign.) 


(Facsimile  signature  of  person  au-  (Official  position.) 

thorized  to  sign.) 


(T.  D.  1988.) 
Certificate  of  Ownership  of  Bonds — Nonresident  Alien. 

(Form  1060)   provided  to  be  executed  by  foreign  banks  or  bankers 
may  be  used  by  domestic  banks  or  bankers. 

The  provisions  of  T.  D.  1977  permitting  responsible  banks 
or  bankers  of  foreign  countries  to  execute  certificates  of  own- 
ership (Form  1060)  for  nonresident  alien  owners  of  bonds 
of  domestic  corporations  are  hereby  extended  to  and  for  the 
use  of  responsible  banks  or  bankers  in  the  United  States  for 
and  in  behalf  of  nonresident  alien  owners  of  bonds  of  United 
States  corporations. 


(T.  D.  1989.) 

Designation  of  losses  which  are  deductible  from  gross  income  within 
a  taxable  year. 

Several  letters  have  been  received  in  which  inquiry  has  been 
made  as  to  whether  losses  resulting  from  the  sale  of  real  estate 


202  Federal  Income  Tax 

by  individuals  are  properly  deductible  from  gross  income  in 
the  returns  of  annual  net  income  of  individuals  for  the  in- 
come tax. 

Under  paragraph  B  of  the  Income  Tax  Law  it  is  provided 
that  among  the  deductions  to  be  allowed  shall  be  "losses  actu- 
ally sustained  during  the  year,  incurred  in  trade  or  arising 
from  fires,  storms,  or  shipwreck,  and  not  compensated  for  by 
insurance  or  otherwise." 

Losses  arising  from  fires,  storms,  or  shipwreck  and  not  com- 
pensated for  by  insurance  or  otherwise  are  easily  ascertained 
and  there  would  not  appear  to  be  any  chance  of  an  erroneous 
construction  as  to  these.  Losses  actually  sustained  during 
the  year  incurred  in  trade  are  limited  by  the  language  of  the 
act  itself. 

"In  trade"  is  synonymous  with  business. 

"Business"  has  been  defined  as — 

That  which  occupies  and  engages  the  time,  attention,  and  labor  of 
any  one  for  the  purpose  of  livelihood,  profit,  or  improvement;  that 
which  is  his  personal  concern  or  interest;  employment,  regular  occu- 
pation, but  it  is  not  necessary  that  it  should  be  his  sole  occupation 
or  employment. 

The  doing  of  a  single  act  incidentally  or  of  necessity  not 
pertaining  to  the  particular  business  of  the  person  doing  the 
same  will  not  be  considered  engaging  in  or  carrying  on  the 
business. 

It  is  therefore  held  that  no  losses  are  deductible  in  a  return 
of  income  save  and  only  those  losses  permitted  and  provided 
for  by  the  statute,  viz.,  those  actually  sustained  during  the 
year — 

Which  are  "incurred  in  trade," 

Or  which  arise  from  "fires,  storms,  or  shipwreck  and  not 
compensated  for  by  insurance  or  otherwise." 


Treasury  Department  Special  Rulings         203 

(T.  D.  1992— See  T.  D.  2006.) 

Bonds  of  foreign  corporations  payable,  as  to  interest,  wholly  within 
the  United  States,  or  within  or  without  the  United  States,  at  the 
option  of  the  owner  of  the  bonds,  to  be  treated  for  income-tax 
purposes  as  domestic  bonds  when  accompanied  by  certificates  of 
ownership  properly  executed. 

Where  foreign  corporations  have  an  issue  of  bonds,  the  in- 
terest upon  which  is  payable  wholly  within  the  United  States, 
or  within  or  without  the  United  States,  at  the  option  of  the 
owners  of  the  bonds,  in  all  cases  where  said  foreign  corpora- 
tions have  fiscal  agents  within  the  United  States  and  the  said 
bonds  are  owned  by  citizens  of  the  United  States  or  aliens 
resident  within  the  United  States,  the  collection  of  interest 
on  said  bonds  shall  be  considered  to  be  and  be  treated  as  a 
domestic  transaction  upon  the  filing  with  said  coupons  certifi- 
cates of  ownership  properly  executed :  Provided,  That  when- 
ever coupons  from  foreign  bonds  not  accompanied  by  certifi- 
cates of  ownership  are  presented  for  collection  they  shall  be 
treated  as  foreign  items,  and  the  first  bank  or  collecting  agency 
receiving  or  accepting  the  same  for  collection  or  otherwise 
shall  deduct,  withhold,  and  pay  the  tax  as  provided  by  in- 
come-tax regulations  for  the  collection  of  foreign  income. 

Where  a  foreign  corporation  has  an  issue  of  registered 
bonds,  the  interest  on  which  is  payable  through  a  fiscal  agent 
in  the  United  States,  certificates  of  exemption  may  be  filed 
with  said  fiscal  agent  in  manner  and  form  as  prescribed  by 
T.  D.  1974,  and  payment  by  said  fiscal  agent  shall  be  made 
in  accordance  with  the  provisions  of  T.  D.  1974. 


(T.  D.  1993.) 

Interest  paid  on  indebtedness  wholly  secured  by  collateral  the  sub- 
ject of  sale  in  the  ordinary  business  of  a  corporation  may  be 
deducted  as  a  part  of  its  expense  of  doing  business. 

This  office  is  in  receipt  of  numerous  letters  asking  a  ruling 
of  this  office  as  to  the  application  of  the  following  proviso 


204  Federal  Income  Tax 

quoted  from  subdivision  (b)  of  subsection  G  of  section  2,  act 
of  Congress  approved  October  3,  1913,  to  wit: 

Provided,  That  in  the  case  of  indebtedness  wholly  secured  by  col- 
lateral the  subject  ot  sale  in  the  ordinary  business  of  such  corpora- 
tion, joint-stock  company  or  association,  the  total  interest  secured 
and  paid  by  such  company,  corporation,  or  association,  within  the 
year  on  any  such  indebtedness  may  be  deducted  as  a  part  of  its  ex- 
pense of  doing  business. 

Many  of  these  inquiries  come  from  corporations  engaged  in 
buying  and  selling  real  estate,  which  real  estate  is  pledged  for 
the  payment  of  indebtedness,  and  the  question  submitted  is 
whether  or  not  such  real  estate  is  "collateral"  within  the 
meaning  of  the  proviso  quoted  and  whether  or  not  corpora- 
tions paying  interest  on  indebtedness  wholly  secured  by  such 
collateral  may  deduct  from  gross  income  as  "an  expense  of 
doing  business"  the  amount  of  interest  paid  on  such  indebted- 
ness. 

Relative  to  this  you  are  informed  that  "collateral,"  as  used 
in  this  proviso,  comj>rehends  and  includes  real  estate  or  any 
form  of  physical  or  tangible  property  bound  for  the  perform- 
ance of  certain  covenants,  the  payment  of  certain  obligations, 
and  if  such  real  estate  or  other  physical  or  tangible  property 
is  the  "subject  of  sale  in  the  ordinary  business  of  the  corpora- 
tion" owning  the  same,  that  is,  if  such  corporation  is,  as  a 
matter  of  its  ordinary  business,  engaged  in  buying  and  selling, 
or  dealing  in  such  property,  the  interest  actually  paid  within 
the  year  on  indebtedness  wholly  secured  by  such  collateral 
(a  mortgage  on  such  property)  may  be  allowably  deducted 
from  gross  income  under  item  4  (a)  of  the  return  form  as  an 
expense  of  doing  business,  without  regard  to  the  limit  of  de- 
ductible interest  as  set  out  in  subdivision  "Third,"  paragraph 
(b),  subsection  G  of  the  Federal  Income  Tax  Law  hereinbe- 
fore cited. 

This  construction  of  the  proviso  quoted  is  not  intended  to 
and  does  not  authorize  the  deduction  as  "an  expense  of  doing 
business"  of  any  interest  paid  or  indebtedness  secured  by 
property,  real  or  personal,  which  is  not  the  "subject  of  sale  in 


Treasury  Department  Special  Rulings         205 

the  ordinary  business  of  the  corporation,"  but  which  is  held 
by  it  for  the  purpose  of,  or  as  an  instrument  in  carrying  on, 
its  ordinary  business — such  as  the  rights  of  way  and  other 
property  of  public  utility  companies,  permanent  office  build- 
ings and  property  of  like  character  held  or  occupied  for  their 
own  particular  use  or  purpose  in  the  furtherance  of  the  objects 
of  the  corporation,  but  Avhich  property  is  not  the  subject  of 
sale  in  their  ordinary  business,  and  which  is  simply  occupied 
or  used  as  an  instrument  or  means  of,  or  essential  to,  the 
carrying  on  of  the  ordinary  business  for  the  transaction  of 
which  they  are  organized.  The  fact  that  such  property  may 
be  subject  to  sale  under  extraordinary  or  peculiar  conditions 
does  not  qualify,  but  rather  disqualifies,  it  as  "collateral" 
such  as  is  contemplated  by  this  provision  of  the  act  cited. 

The  only  corporations,  joint-stock  companies,  or  associa- 
tions which  will  be  allowed  under  this  proviso  as  herein  in- 
terpreted to  deduct  as  "an  expense  of  doing  business"  interest 
paid  on  indebtedness  wholly  secured  by  mortgage  on  real 
estate,  or  other  physical  and  tangible  property,  are  those  cor- 
porations, joint-stock  companies,  or  associations  which  are 
organized  and  operated  for  the  exclusive  purpose  of  buying, 
selling,  and  dealing  in  the  particular  kind  of  property  upon 
which  the  mortgage  is  given,  and  the  particular  property 
pledged  for  the  debt  upon  which  the  interest  is  paid  must  be 
the  "subject  of  sale  in  the  ordinary  business  of  the  corpora- 
tion." 

Any  corporation  whose  indebtedness  is  secured  by  a  trust, 
mortgage,  or  by  any  form  of  indenture  which  covers  and  in- 
cludes in  the  lien  any  property  which  is  not  the  subject  of  sale 
in  the  ordinary  business  of  such  corporation,  will  be  and  is 
excluded  from  the  benefit  of  this  proviso,  as  hereinbefore 
construed,  and  its  interest  deduction  will  be  limited  to  the 
amount  authorized  in  subdivision  "Third"  above  referred  to — 
that  is,  the  interest  actually  paid  within  the  year  at  the  con- 
tract rate  on  an  amount  of  bonded  or  other  indebtedness  at  no 
time  within  the  year  in  excess  of  a  sum  ascertained  by  adding 
to  the  paid-up  capital  stock  outstanding  at  the  close  of  the 


206  Federal  Income  Tax 

year  one-half  of  the  total  amount  of  the  interest-bearing  in- 
debtedness also  then  outstanding. 

Corporations  which  under  this  ruling  are  entitled  to  deduct 
as  "an  expense  of  doing  business"  the  total  amount  of  interest 
paid  within  the  year  on  "indebtedness  wholly  secured  by  col- 
lateral the  subject  of  sale  in  the  ordinary  business  of  such 
corporations,"  are  required  to  state  separately  in  their  returns 
the  amount  of  indebtedness  upon  which  such  interest  is  paid, 
segregating  it  from  the  indebtedness  not  so  secured  and  upon 
which  the  interest  paid  is  taken  credit  for  or  deducted  under 
item  6  (a)  of  the  return  form.  The  interest-bearing  indebt- 
edness stated  under  item  2  of  the  return  form  as  one  of  the 
bases  for  determining  the  amount  of  interest  which  may  be 
allowably  deducted  under  item  6  (a)  must  not  include  any 
"indebtedness  wholly  secured  by  collateral  the  subject  of  sale 
in  the  ordinary  business  of  the  corporation."  Failure  to  seg- 
regate the  two  forms  of  indebtedness  will  render  the  interest 
deduction  under  item  6  (a)  subject  to  suspension  and  dis- 
allowance. 


(T.  D.  1996.) 

Cooperative  dairies  and  like  organizations  do  not  fall  within  the 
classes  of  organizations  enumerated  in  subsection  G,  section  2, 
act  of  October  3,  1913,  as  exempt,  and  are  required  to  make 
returns  of  annual  net  income. 

Attention  is  called  to  Article  92  of  Kegulations  No.  33, 
approved  January  5,  1914,  in  which  it  is  provided  that  co- 
operative dairies  not  issuing  stock  and  allowing  patrons  divi- 
dends based  on  the  percentage  of  butterfat  in  milk  furnished 
are  not  liable  to  the  requirements  of  section  2,  act  of  October 
3,  1913. 

This  article  is  amended  to  the  effect  that  cooperative  dairy 
associations,  whether  issuing  capital  stock  or  not,  are  required 
to  make  returns  of  annual  net  income  pursuant  to  the  require- 
ments of  this  act. 


Treasury  Department  Special  Rulings         207 

The  only  corporations,  joint-stock  companies  or  associa- 
tions, or  insurance  companies  exempt  from  the  requirements 
of  this  act  are  those  which  fall  within  one  or  another  of  the 
classes  specifically  enumerated  in  the  first  proviso  of  subsec- 
tion G  of  the  act  cited  as  exempt. 

Cooperative  dairies,  no  matter  how  organized,  do  not  ap- 
pear to  fall  within  any  of  these  exempted  classes,  and  will, 
therefore,  be  required  to  make  returns. 

In  the  preparation  of  their  returns,  cooperative  dairies 
may  include  in  their  deductions  from  gross  income  the  amount 
actually  paid  to  members  and  patrons  for  milk,  but  any 
amount  retained  at  the  end  of  the  year  over  and  above  ex- 
penditures will  be  returned  as  net  income,  upon  which  the  tax 
will  be  computed  and  assessed. 

In  so  far  as  Article  92,  hereinbefore  referred  to,  is  in  con- 
flict with  this  ruling,  it  is  hereby  revoked,  and  collectors  will 
require  all  organizations  of  this  character  to  make  returns  of 
annual  net  income  and  in  other  respects  comply  with  the  re- 
quirements of  the  Federal  Income  Tax  Law  as  it  applies  to 
corporations,  joint-stock  companies  or  associations,  and  in- 
surance companies. 

In  so  far  as  applicable,  this  ruling  also  applies  to  mutual 
or  cooperative  telephone  companies,  farmers'  insurance  com- 
panies, and  like  organizations. 


(T.  D.  1997.) 
Monthly  list  returns  not  to  be  made  under  oath. 

The  requirement  that  monthly  list  returns  be  made  under 
oath  (as  provided  by  Articles  35,  50,  53,  and  59,  Income  Tax 
Regulations  No.  33,  when  filed  by  withholding  agents  on  or 
before  the  20th  of  the  month  following  that  in  which  with- 
holding occurred)  is  hereby  waived. 

In  all  cases  the  annual  list  return  required  of  withholding 
agents  (of  which  the  monthly  list  returns  will  form  a  part 


208  Federal  Income  Tax 

as  required  by  regulations)  will  be  made,  sworn  to,  and  filed 
as  now  required  by  existing  regulations,  and  the  jurat  for  the 
annual  list  return  will  cover  the  entire  return  as  thus  made  up. 


(T.  D.  1908.) 


Exemption  certificate  provided  for  use  of  firms,  organizations,  and 
fiduciaries  claiming  exemption  from  withholding  of  tax  at  source 
on  income  other  than  interest  on  bonds. 

The  following  certificate  is  hereby  provided  for  use  of 
firms,  organizations,  and  fiduciaries  for  the  purpose  of  estab- 
lishing their  identity  and  nonliability  to  withholding  at  the 
source  of  income  (other  than  interest  on  bonds)  payable  to 
them.  Said  certificates  shall  be  of  the  size  and  be  printed  on 
yellow  paper  of  the  weight  and  texture  all  as  provided  by 
T.  D.  1976,  the  requirements  of  which  are  hereby  made  appli- 
cable to  the  certificate  hereby  provided. 

(Form  1063.) 

Exemption  Certificate — Firms,  Organizations,  or  Fiduciaries. 

(For  use  of  firms,  organizations,  or  fiduciaries  entitled  to  receive  income  other  than  from 

interest  on  bonds  to  establish  their  identity  and  nonliability  to  withholding 

at  the  source.) 

(Give  name  of  debtor.) 

(Character  of  income,  other  than  interest  on  bonds,  as  rent,  dividends  from  foreign  cor- 
porations, etc.) 

I  do  solemnly  declare  that  the  firm,  organization,  or  person  named 
below  is  entitled  to  receive  the  above-described  income,  and  that 
under  the  provisions  of  the  income  tax  law  and  regulations  said  in- 
come is  exempt  from  having  the  tax  withheld  at  the  source,  and  that 
all  the  information  given  herein  is  true  and  correct. 

Date, 191 

(Name  of  firm,  organization,  or  fiduciary.) 

By.. 

(Signature  of  person  duly  authorized  to  sign 
for  firm  or  organization  and  his  official 
position  or  name  of  trust.) 

Address 

(Give  full  post-office  address  of  firm  or  or- 
ganization or  fiduciary.) 


Treasury  Department  Special  Eulings         209 

The  exemption  certificate  provided  for  the  use  of  indi- 
viduals is  Form  1007,  which  will  be  used  by  individuals  in  all 
cases  except  for  interest  on  bonds,  for  which  Forms  1000  and 
1000B  are  provided. 


(T.  D.  2001— See  2029.) 

Corporations  desiring  to  make  returns  of  annual  net  income  on  the 
basis  of  a  fiscal  year  must  give  notice  in  writing  to  the  collector 
not  less  than  30  days  prior  to  March  1,  designating  in  such  no- 
tice the  last  day  of  some  month  as  the  close  of  the  fiscal  year. 
Failure  to  give  such  notice  at  least  30  days  prior  to  March  1,  or 
to  make  return  for  the  preceding  calendar  year  on  or  before 
March  1,  renders  corporations  liable  to  additional  tax  and  pen- 
alty. 

Your  attention  is  called  to  the  following  provision  quoted 
from  paragraph  O,  subsection  G  of  section  2,  act  of  October 
3,  1913: 

The  tax  herein  imposed  shall  be  computed  upon  its  entire  net  in- 
come accrued  within  each  preceding  calendar  year  ending  December 
thirty-first;  *  *  *  Provided  further,  That  any  corporation,  etc., 
subject  to  this  tax  may  designate  the  last  day  of  any  month  in  the 
year  as  the  day  of  the  closing  of  its  fiscal  year  and  shall  be  entitled 
to  have  the  tax  payable  by  it  computed  upon  the  basis  of  the  net  in- 
come ascertained  as  herein  provided  for  the  year  ending  on  the  day 
so  designated  *  *  *  and  it  shall  give  notice  of  the  day  it  has 
thus  designated  as  the  closing  of  the  fiscal  year  to  the  collector  of 
the  district  in  which  its  principal  business  office  is  located  at  any 
time  not  less  than  thirty  days  prior  to  the  date  upon  which  its  an- 
nual return  shall  be  filed. 

Except  as  provided  in  the  act,  all  corporations  are  required 
to  make  their  returns  of  annual  net  income  on  the  basis  of  the 
calendar  year  and  to  file  such  returns  on  or  before  the  1st  day 
of  March  next  following.  March  1  is,  therefore,  the  primary 
due  date  for  the  returns  of  all  corporations.  This  due  date 
can  be  postponed  only  in  accordance  with  some  legal  or 
authorized  action.  Unless  such  action  is  taken  within  the 
prescribed  time,  or  the  returns  filed  on  or  before  March  1,  all 
corporations  in  existence  at  the  preceding  December  31  and 
14 


210  Federal  Income  Tax 

failing  to  take  such  action,  or  so  file  their  returns  for  the 
period  ended  December  31,  will  be  held  to  be  delinquent,  and 
will  be  subject  to  50  per  cent  additional  tax  and  the  penalty 
of  the  law. 

The  filing  of  returns  at  any  date  other  than  on  or  before 
March  1  and  on  a  basis  other  than  the  calendar  year  can  be 
authorized  only  in  cases  wherein  corporations,  not  less  than 
30  days  prior  to  March  1,  give  notice  in  writing  to  the  col- 
lector of  the  district  in  which  are  located  their  principal 
places  of  business,  designating  in  such  notice  the  last  day  of 
some  month  as  the  close  of  their  fiscal  year.  In  this  case  the 
corporations  will  make  their  returns  for  the  year  so  estab- 
lished, and  will  file  their  returns  on  or  before  the  last  day  of 
the  60-day  period  next  following  the  date  designated  as  the 
close  of  the  fiscal  year. 

For  the  purpose  of  the  income  tax  law,  a  fiscal  year,  when 
designated,  must  be  so  designated  that  the  return  made  on 
this  basis  will  not  comprehend  a  period  greater  than  12  con- 
secutive months.  If  the  required  notice  is  delayed  until  it 
cannot  be  given  at  least  30  days  prior  to  March  1,  or  if  the 
date  designated  as  the  close  of  the  fiscal  year  comprehends  a 
period  greater  than  12  months  from  the  close  of  the  period 
for  which  the  last  prior  return  was  made,  the  returns  must 
be  made  as  of  the  calendar  year  and  must  be  filed  on  or  before 
March  1  until  such  time  as  a  fiscal  year  for  this  purpose  can 
be  legally  established. 

If  a  corporation  which  shall  have  filed,  on  or  before  March 
1,  its  return  for  the  preceding  period  ended  December  31, 
desires  to  establish,  as  a  basis  for  making  future  returns,  a 
fiscal  year  ended  at  some  date  prior  to  the  next  December  31, 
it  may  do  so  by  filing,  at  least  30  days  prior  to  the  date  when 
its  returns,  on  a  fiscal  year  basis,  will  be  due,  a  notice  with 
the  collector  designating  the  last  day  of  some  month  as  the 
close  of  its  fiscal  year.  It  will  then,  on  or  before  the  last  day 
of  the  60-day  period  next  following  the  date  so  designated, 
file  a  return  covering  the  period  from  January  1  to  the  date 


Treasury  Department  Special  Rulings         211 

so  designated  in  the  same  year,  and  thereafter  its  returns 
will  be  made  for  each  twelve-month  period  next  following 
such  date. 

The  above  rulings  will  apply  to  corporations  which  began 
business  within  the  year,  as  well  as  to  those  which  were  in 
existence  and  transacted  business  throughout  the  year. 

Any  ruling  or  Treasury  decision  heretofore  issued  and  in 
conflict  with  this  decision  is  hereby  recalled  and  revoked. 


(T.  D.  2005— See  2130  and  2090,  page  12.) 

Instructions  and  rules  for  determining  what  amount  is  to  be  allowed 
as  a  deduction  tor  loss  in  a  return  ot  income. — Depreciation 
allowed  by  law  does  not  include  shrinkage  in  value  of  stocks, 
bonds,  etc. 

For  the  purpose  of  checking  up  returns  and  ascertaining 
the  amount  of  taxable  income  of  individuals  and  corporations 
you  are  given  the  following  instructions  and  rules  for  use  in 
determining  the  amount  of  deductible  loss  allowable  to  indi- 
viduals and  corporations  under  the  fourth  deduction  (par.  B, 
p.  5),  Regulations  No.  33,  and  second  deduction,  for  domestic 
corporations  (par.  G,  p.  11),  and  second  deduction,  for  for- 
eign corporations  (par.  G,  p.  15),  Regulations  Xo.  33. 

The  loss  considered  here  has  in  it  no  element  of  "deprecia- 
tion," or  "allowance  for  wear  and  tear,"  or  "compensation 
from  insurance  or  otherwise."  It  is  to  be  such  loss  as  is  abso- 
lute and  complete  and  which  has  been  actually  sustained. 

Depreciation  as  an  allowable  deduction  in  ascertaining 
annual  net  income  for  the  income  tax  is  separately  provided 
for  and  is  not  to  be  confused  with  loss.  The  depreciation 
provided  to  be  taken  as  a  deduction  in  a  return  of  income  is 
the  value  assigned  to  the  deterioration  of  physical  improve- 
ments or  assets,  such  as  are  susceptible  of  having  their  value 
lessened  through  wear  and  tear,  use  or  obsolescence. 

The  depreciation  referred  to  in  the  income-tax  law  does  not 


212  Federal  Income  Tax 

relate  to  evidence  of  a  right  or  interest  in  property,  and  hence 
any  shrinkage  in  the  value  of  bonds,  stocks,  and  like  securi- 
ties due  to  fluctuations  in  their  market  value  is  not  deductible 
in  a  return  of  income  as  depreciation  or  loss. 

Losses  may  be  sustained  by  individuals  or  corporations  on 
personal  or  real  property.  Only  those  losses  are  deductible 
which  are  sustained  during  the  tax  year  "in  trade" — that  is, 
the  business  which  engages  the  time,  attention,  and  labor  of 
any  one  for  the  purpose  of  livelihood,  profit,  or  improvement. 
Loss  to  bo  deductible  must  be  an  absolute  loss,  not  a  specula^ 
tive  or  fluctuating  valuation  of  continuing  investment,  but 
must  be  an  actual  loss,  actually  sustained  and  ascertained 
during  the  tax  year  for  which  the  deduction  is  sought  to  be 
made;  it  must  be  incurred  in  trade  and  be  determined  and 
ascertained  upon  an  actual,  a  completed,  a  closed  transaction. 

Losses  sustained  by  individuals  or  corporations  from  the 
sale  of  or  dealings  in  personal  or  real  property  growing  out 
of  ownership  or  use  of  or  interest  in  such  property  will  not 
be  deductible  at  all  unless  they  are  an  incident  of,  connected 
with,  and  grow  out  of  the  business  of  the  individual  or  cor- 
poration sustaining  the  loss,  and  are  ascertained,  determined, 
and  fixed  as  absolute  in  the  above  sense  within  the  taxable 
year  in  which  the  deduction  is  sought  to  be  made.  When  loss 
under  this  heading  is  ascertained  to  be  deductible,  the  entire 
amount  of  the  loss  will  be  deductible  except  where  the  prop- 
erty in  connection  with  which  the  loss  occurred  was  acquired 
prior  to  March  1,  1913,  in  the  case  of  individuals,  and  prior 
to  January  1,  1909,  in  the  case  of  corporations,  and  then  and 
in  such  event  the  loss  ascertained  will  be  prorated  over  the 
whole  time  the  property  was  held,  and  that  part  of  the  whole 
loss  apportioned  to  the  taxable  period  will  be  taken  into  ac- 
count in  annual  returns  of  income.  In  prorating,  fractional 
parts  of  years  will  not  be  considered. 

Loss  is  the  difference  between  selling  price  and  cost  where 
the  selling  price  is  less  than  cost. 

Cost  of  property  purchased  prior  to  the  incidence  of  the 
special  excise  tax   (Jan.   1,  1909),  or  the  incidence  of  the 


Treasury  Department  Speciax  Rulings         213 

income  tax  (Mar.  1,  1913),  will  be  the  actital  price  paid  for 
the  property,  including  the  expense  incident  to  the  procure- 
ment of  the  property  in  the  first  instance  and  its  sale  there- 
after, together  with  carrying  charges  of  interest,  insurance, 
and  taxes  actually  paid  prior  to  the  incidence  of  tax  (special 
assessments,  if  any,  "actually  paid"  as  "local  benefits"  in 
connection  with  real  estate)  ;  provided  that  where,  up  to  the 
incidence  of  the  tax,  the  expense  of  carrying  property  has 
exceeded  the  income  from  it,  the  difference  between  the  ex- 
pense of  carrying  and  the  income  from  the  property  shall  be 
added  to  the  purchase  price  and  the  sum  thus  ascertained 
shall  be  the  cost  of  the  property ;  and  provided  further,  that 
in  the  case  of  property  purchased  prior  to  the  incidence  of 
the  tax  and  sale  thereof  subsequent  to  the  incidence  of  the  tax 
there  shall  be  excluded  from  consideration  in  ascertaining 
cost  any  items  of  income,  expense,  interest,  and  taxes  previ- 
ously taken  into  account  in  preparing  a  return  of  annual  net 
income. 

The  cost  of  property  acquired  subsequent  to  the  incidence 
of  the  tax  will  be  the  actual  price  paid  for  it,  together  with 
the  expense  incident  to  the  procurement  of  the  property  in 
the  first  instance  and  its  sale  thereafter  and  the  cost  of  im- 
provement or  development,  if  any. 

All  existing  rulings  and  regulations  in  conflict  herewith 
are  hereby  annulled  and  superseded. 


(T.  D.  2006.) 

Definition  of  "foreign  corporation"  and  "fiscal  agent"  as  used  in  T.  D. 
1992,  and  further  explanation  of  method  of  handling  collection 
of  income  from  bonds  of  such  foreign  corporations  and  foreign 
countries  having  fiscal  agents  in  the  United  States. 

Doubt  having  arisen  as  to  the  comprehensiveness  of  the 
term  "foreign  corporation,"  and  the  duties  under  the  income 
tax  law  of  "fiscal  agents,"  as  provided  in  T.  D.  1992,  you  are 


214  Federal  Income  Tax 

advised  that  ''foreign  corporations"  as  used  in  said  decision 
was  intended  to  include  municipal  and  private  corporations 
holding  charters  under  laws  of  countries  foreign  to  the  United 
States,  and  "hscal  agents"  refers  to  financial  agents  in  the 
ordinary  sense,  upon  whom  the  law  casts  the  same  duties  with 
reference  to  withholding  and  paying  the  tax  as  are  imposed 
upon  withholding  and  paying  agents  of  domestic  corporations 
by  appointment. 

Where  a  foreign  government  has  a  fiscal  agent  in  the  United 
States  for  the  purpose  of  paying  the  interest  on  its  obligations, 
such  fiscal  agent  will  be  charged  with  the  duty  of  withholding 
and  paying  the  tax  on  such  interest  payments,  except  to  the 
extent  of  exemption  claimed. 

"Where  such  foreign  countries  or  corporations  have  an  issue 
of  bonds  payable  wholly  within  the  United  States  or  within 
or  without  the  United  States,  at  the  option  of  the  owner  of 
the  bonds,  and  where  the  coupons  from  such  bonds  are  pre- 
sented for  payment  to  the  fiscal  agent  in  the  United  States  of 
such  foreign  countries  or  corporations  or  for  collection  to  a 
bank  or  collecting  agency  whether  licensed  or  not,  with  owner- 
ship certificate  attached,  then  and  in  all  such  cases  said  cou- 
pons shall  be  treated  as  domestic  items  and  the  aforesaid  fiscal 
agents  will  be  charged  with  the  duties  and  responsibilities  of 
withholding  and  paying  agents,  and  will  make  return  on  Form 
1012,  as  provided  by  income  tax  regulations. 

Where,  however,  such  coupons  are  not  presented  with  such 
ownership  certificates  attached,  they  shall  be  received  only 
by  a  licensed  bank  or  collecting  agency,  and  when  so  received 
shall  be  considered  to  be  and  be  treated  as  foreign  items,  in 
accordance  with  the  regulations  for  the  collection  of  foreign 
income. 

This  ruling  is  made  in  explanation  and  amendment  of 
T.  D.  1992  and  other  applicable  regulations. 


Treasury  Department  Special  Rulings         215 

(T.  D.  2011.) 
Taxability  of  commissions  on  renewal  premiums  on  insurance. 

Commissions  on  renewal  premiums  for  insurance  are  in- 
come when  received  and  income  for  the  period  in  which 
received.  Therefore,  commissions  on  renewal  premiums  re- 
ceived between  March  1  and  December  31,  1913,  are  taxable 
income  for  that  period  and  should  be  included  in  returns  of 
income  for  1913. 

Where  commissions  on  renewal  premiums  received  by  indi- 
viduals between  March  1  and  December  31,  1913  (including 
commissions  on  renewal  premiums  on  business  written  prior 
to  March  1,  1913,  and  payable  and  paid  subsequent  to  that 
date),  were  not  included  in  returns  of  income  of  such  indi- 
viduals for  1913,  they  should  file  amended  returns  and  in- 
clude in  such  amended  returns  the  amount  of  said  commis- 
sions on  renewal  premiums. 

Where  returns  of  annual  net  income  were  not  made  by 
individuals  in  receipt  of  commissions  on  renewal  premiums 
because  of  insufficient  income  to  require  a  return  of  income, 
and  such  showing  of  insufficient  income  was  caused  by  the 
exclusion  from  the  return  of  said  commissions  on  renewal 
premiums,  such  individuals  should  make  and  file  returns  of 
income  and  include  therein  the  commissions  received  by  them 
on  renewal  premiums  within  the  period  from  March  1  to 
December  31,  1913. 


(T.  D.  2012.) 

Extending  exemption  certificate  No.  1063,  as  prescribed  in  T.  D.  1998, 
to  nonresident  alien  individuals. 

Exemption  certificate  1063,  as  provided  in  T.  D.  1998,  is 
hereby  extended  to  and  made  applicable  to  the  use  of  persons 
who  are  nonresident  aliens  in  claiming  exemption  from 
income  tax  on  dividends  payable  in  the  United  States  from 
stock  of  foreign  corporations. 


216  Federal  Income  Tax 

(T.  D.  2013— See  2109  and  2242.) 

Nonresident  aliens — Amendment  of  article  8  of  Regulations  33,  pro- 
viding for  the  collection  of  tax  on  income  of  nonresident  aliens 
derived  from  trades  or  professions  in  the  United  States. 

Article  8,  Income  Tax  Kegulations  33,  is  hereby  amended 
by  adding  thereto  the  following: 

The  person,  firm,  company,  copartnership,  corporation,  joint-stock 
company  or  association,  and  insurance  company  in  the  United  States 
— citizen  or  resident  alien — in  whatever  capacity  acting,  having  the 
control,  receipt,  disposal,  or  payment  of  fixed  or  determinable  annual 
or  periodical  gains,  profits,  and  income,  of  whatever  kind,  to  a  non- 
resident alien,  under  any  contract  or  otherwise,  and  which  payment 
shall  represent  income  of  a  nonresident  alien  from  the  exercise  of 
any  trade  or  profession  within  the  United  States,  shall  make  return 
for  such  nonresident  alien  on  Form  1040  and  shall  pay  any  and  all 
tax — normal  and  additional  tax — chargeable  upon  the  said  income  of 
such  nonresident  alien. 

(T.  D.  2109.) 

So  that  Article  8  as  amended  shall  read : 

Art.  8.  The  income  of  nonresident  aliens  subject  to  the  normal  tax 
of  1  per  cent  shall  consist  of  the  total  gains,  profits,  and  income  de- 
rived from  all  property  owned  and  from  every  business,  trade,  or 
profession  carried  on  within  the  United  States  (to  be  designated  as 
gross  income),  less  deductions  (1  to  8,  inclusive)  specifically  enu- 
merated in  paragraph  B  of  the  act  (see  Art.  6),  in  so  far  as  said  de- 
ductions relate  to  said  gains,  profits,  etc. 

The  specific  exemption  in  paragraph  C  of  the  act  cannot  be  allowed 
as  a  deduction  in  computing  the  normal  tax  of  nonresident  aliens. 

Nonresident  aliens  are  subject  to  additional  or  surtax  the  same  as 
prescribed  in  the  case  of  citizens  of  the  United  States  or  persons 
residing  in  the  United  States. 

The  responsible  heads,  agents,  or  representatives  of  said  nonresi- 
dent aliens  who  are  in  charge  of  the  property  owned  or  business  car- 
ried on  shall  make  full  and  complete  return  of  the  income  there- 
from on  Form  1040  and  shall  pay  any  and  all  tax,  normal  and  addi- 
tional, assessed  upon  the  said  income  of  such  nonresident  aliens. 

The  person,  firm,  company,  copartnership,  corporation,  joint-stock 
company  or  association,  and  insurance  company  in  the  United  States 
— citizen  or  resident  alien — in  whatever  capacity  acting,  having  the 


Treasury  Department  Special  Rulings         217 

control,  receipt,  disposal,  or  payment  of  fixed  or  determinable  annual 
or  periodical  gains,  profits,  and  income,  of  whatever  kind,  to  a  non- 
resident alien,  under  any  contract  or  otherwise,  which  payment 
shall  represent  income  of  a  nonresident  alien  from  the  exercise  of 
any  trade  or  profession  within  the  United  States,  shall  deduct  and 
withhold  from  such  annual  gains,  profits  and  income,  regardless 
of  amount,  and  pay  to  the  officer  of  the  United  States  Government 
authorized  to  receive  the  same,  such  tax  as  will  be  sufficient  to  pay 
the  normal  tax  of  1  per  cent  imposed  thereon  by  law,  and  shall 
make  an  annual  return  on  Form  1042. 


(T.  D.  2015.) 
Compromises — Minimum  amounts  which  will  be  accepted. 

To  collectors  of  internal  revenue: 

The  fact  has  been  developed  that  a  great  number  of  indi- 
viduals and  corporations  failed  to  make  returns  of  annual 
net  income  for  the  income  tax,  either  through  ignorance  of 
the  requirements  of  the  law  or  through  a  misunderstanding 
of  its  requirements,  and  it  has  been  determined  by  the  Treas- 
ury Department  to  accept  offers  in  compromise  of  the  specific 
penalty  for  failure  to  file  returns  within  the  period  prescribed 
by  law  in  a  minimum  sum,  as  follows:  $5  from  individuals, 
$10  from  corporations  which  are  organized  for  profit. 

In  the  cases  of  all  corporations  not  organized  for  profit,  the 
specific  penalty  will  not  be  asserted  this  year,  provided  the 
required  return  has  been  or  shall  be  filed  before  December 
31,  191-4.  The  United  States  District  Attorney  should  be 
requested  not  to  institute  proceedings  in  such  cases. 

The  foregoing  applies  only  to  those  cases  where  there  was 
no  intent  to  evade  the  law  or  escape  taxation. 

In  all  cases,  however,  wherein  a  return  is  not  made  until 
the  liability  to  make  a  return  is  discovered  by  investigation 
of  collectors  of  internal  revenue  or  revenue  agents,  the  above 
schedule  will  not  necessarily  apply,  but  each  individual  case 
will  be  decided  upon  its  own  merits  and  the  amount  of  the 
offer  in  compromise  which  may  be  favorably  considered  will 
be  determined  accordingly. 


218  Federal  Income  Tax 

(T.  D.  2016.) 

Inspection    of    income    tax    returns — Executive    order — -Regulations. 

The  following  Executive  order,  together  with  regulations 
signed  by  the  Secretary  and  approved  by  the  President,  rela- 
tive to  the  publicity  feature  of  section  2  of  the  act  of  October 
3,  1913,  imposing  an  income  tax,  is  hereby  published  for  your 

information.  _  _ 

Executive  Order. 

Pursuant  to  the  provisions  of  Section  2  of  the  Tariff  Act  of  October 
3,  1913,  said  section  providing  for  an  income  tax,  and  which  contains 
in  paragraph  G,  sub-paragraph  (d)  the  following  provision, 

When  the  assessment  shall  be  made,  as  provided  in  this  section,  the  returns,  together 
with  any  corrections  thereof  which  may  have  been  made  by  the  Commissioner,  shall  be 
filed  in  the  office  of  the  Commissioner  of  Internal  Revenue  and  shall  constitute  public 
records  and  be  open  to  inspection  as  such:  Provided,  That  any  and  all  such  returns  shall 
be  open  to  inspection  only  upon  the  order  of  the  President,  under  rules  and  regulations 
to  be  prescribed  by  the  Secretary  of  the  Treasury  and  approved  by  the  President:  Pro- 
vided further.  That  the  proper  officers  of  any  State  imposing  a  general  income  tax  may, 
upon  the  request  of  the  Governor  thereof,  have  access  to  said  returns_  or  to  any  abstract 
thereof,  showing  the  name  and  income  of  each  such  corporation,  joint-stock  company, 
association  or  insurance  company,  at  such  times  and  in  such  manner  as  the  Secretary  of 
the  Treasury  may  prescribe, 

it  is  hereby  ordered,  that  all  such  returns  shall  be  subject  to  inspec- 
tion in  accordance  and  upon  compliance  with  rules  and  regulations 
prescribed  by  the  Secretary  of  the  Treasury  and  approved  by  the 
President,  bearing  even  date  herewith.  Woodrow  Wilson. 

The  White  House,  July  28,  1914. 

[No.  1999.J 

Inspection  of  Returns. 

Regulations  governing  the  inspection  of  returns  of  corporations, 
joint-stock  companies,  associations,  or  insurance  companies, 
made  in  compliance  with  the  requirements  of  section  2,  act  of 
October  3,  1913.  Returns  of  individuals  are  not  open  to  the  in- 
spection of  any  one  except  the  proper  officers  and  employees  of 

the  Treasury  Department. 

Treasury  Department, 

Washington,  D.  C,  July  28,  1914. 
By  section  2  of  the  act  of  October  3,  1913,  Congress  imposed  a  tax 
upon  the  entire  net  income  arising  or  accruing  from  all  sources  to 
every  citizen  of  the  United  States,  whether  residing  at  home  or 
abroad,  and  to  every  person  residing  in  the  United  States,  though 
not  a  citizen  thereof,  and  upon  the  entire  net  income  from  all  prop- 
erty owned  and  of  every  business,  trade,  or  profession  carried  on  in 
the  United  States  by  persons  residing  elsewhere,  and  upon  every  cor- 


Treasury  Department  Special  Rulings         219 

poration,  joint-stock  company  or  association,  and  every  insurance 
company,  with  certain  exceptions,  engaged  in  business  in  the  United 
States,  and  prescribed  the  method  of  handling  the  returns  of  annual 
net  income  filed  in  compliance  with  said  law,  as  follows: 

(d)  When  the  assessment  shall  be  made,  as  provided  in  this  section,  the  returns,  to- 
gether with  any  corrections  thereof  which  may  have  been  made  by  the  Commissioner, 
shall  be  filed  in  the  office  of  the  Commissioner  of  Internal  Revenue  and  shall  constitute 
public  records  and  be  open  to  inspection  as  such:  Provided,  That  any  and  all  such  re- 
turns shall  be  open  to  inspection  only  upon  the  order  of  the  President,  under  rules  and 
regulations  to  be  prescribed  by  the  Secretary  of  the  Treasury  and  approved  by  the  Pres- 
ident: Provided  further,  That  the  proper  officers  of  any  State  imposing  a  general  income 
tax  may,  upon  the  request  of  the  Governor  thereof,  have  access  to  said  returns  or  to  an 
abstract  thereof,  showing  the  name  and  income  of  each  such  corporation,  joint-stock  com- 
pany or  association  or  insurance  company,  at  such  times  and  in  such  manner  as  the  Sec- 
retary of  the  Treasury  may  prescribe. 

For  the  purpose  of  making  effective  the  legislative  intent  thus  ex- 
pressed, the  President  has  ordered  that  such  returns  shall  be  open 
to  inspection  under  the  following  rules  and  regulations.  The  word 
"corporation,"  when  used  alone  herein,  shall  be  construed  to  refer  to 
corporations,  joint-stock  companies  or  associations,  and  insurance 
companies. 

1.  The  return  of  every  individual,  and  of  every  corporation,  joint- 
stock  company  or  association,  and  every  insurance  company,  whether 
foreign  or  domestic,  shall  be  open  to  the  inspection  of  the  proper 
officers  and  employees  of  the  Treasury  Department.  Returns  of  in- 
dividuals shall  not  be  subject  to  inspection  by  any  one  except  the 
proper  officers  and  employees  of  the  Treasury  Department. 

2.  Where  access  to  any  return  of  any  corporation  is  desired  by  an 
officer  or  employee  of  any  other  department  of  the  Government,  an 
application  for  permission  to  inspect  such  return,  setting  out  the 
reasons  therefor,  shall  be  made  in  writing,  signed  by  the  head  of  the 
Executive  Department  or  other  Government  establishment  in  which 
such  officer  or  employee  is  employed,  and  transmitted  to  the  Secre- 
tary of  the  Treasury.  If  the  return  of  a  corporation  is  desired  to  be 
used  in  any  legal  proceedings  other  than  those  to  which  the  United 
States  is  a  party,  or  to  be  used  in  any  manner  by  which  any  infor- 
mation contained  in  the  return  could  be  made  public,  the  application 
for  permission  to  inspect  such  return  or  to  furnish  a  certified  copy 
thereof  shall  be  referred  to  the  Attorney  General,  and,  if  recom- 
mended by  him,  transmitted  to  the  Secretary  of  the  Treasury. 

3.  All  returns,  whether  of  persons  or  of  corporations,  joint-stock 
companies  or  associations,  or  insurance  companies,  may  be  furnished, 
upon  approval  of  the  Secretary  of  the  Treasury,  for  use,  either  in 
the  original  or  by  certified  copies  thereof,  in  any  legal  proceedings 
before  any  United  States  grand  jury  or  in  the  trial  of  any  cause  to 
which  both  the  United  States  and  the  person  or  corporation  or  asso- 
ciation rendering  the  return  are  parties  either  as  plaintiff  or  defend- 
ant, and  in  the  prosecution  or  defense  or  trial  of  which  action,  or 


220  Federal  Income  Tax 

proceeding  before  a  grand  jury,  such  return  would  constitute  mate- 
rial evidence,  but  in  any  case  arising  in  the  collection  of  the  income 
tax,  the  Commissioner  of  Internal  Revenue  may  furnish  for  use  to 
the  proper  officer  either  the  original  or  certified  copies  of  returns 
without  the  approval  of  the  Secretary  of  the  Treasury.  In  all  cases 
where  the  use  of  the  original  return  is  necessary,  it  shall  be  placed 
in  evidence  by  the  Commissioner  of  Internal  Revenue  or  by  some 
officer  of  the  Bureau  of  Internal  Revenue  designated  by  him  for  that 
purpose,  and  after  such  original  return  has  been  placed  in  evidence 
It  shall  be  returned  to  the  files  in  the  office  of  the  Commissioner  of 
Internal  Revenue  at  Washington,  D.  C. 

4.  The  Secretary  of  the  Treasury,  at  his  discretion,  upon  applica- 
tion to  him  made,  setting  forth  what  constitutes  a  proper  showing  of 
cause,  may  permit  inspection  of  the  return  of  any  corporation  by 
any  bona  fide  stockholder  in  such  corporation.  The  person  desiring 
to  inspect  such  return  shall  make  application,  in  writing,  to  the 
Secretary  of  the  Treasury,  setting  forth  the  reasons  why  he  should 
be  permitted  to  make  such  inspection,  and  shall  attach  to  his  appli- 
cation a  certificate,  signed  by  the  president,  or  other  principal  officer, 
of  such  corporation,  countersigned  by  the  secretary,  under  the  cor- 
porate seal  of  the  company,  that  he  is  a  bona  fide  stockholder  in  said 
company.  (Where  this  certificate  cannot  be  secured,  other  evidence 
will  be  considered  by  the  Secretary  of  the  Treasury  to  determine  the 
fact  whether  or  not  the  applicant  is  a  bona  fide  stockholder  and, 
therefore,  entitled  to  inspect  the  return  made  by  such  company.) 
Upon  receipt  of  such  application  the  corporation  whose  return  it  is 
desired  to  inspect  shall  be  notified  of  the  facts  and  shall  be  given 
opportunity  to  state  whether  any  legitimate  reason  exists  for  re- 
fusing permission  to  inspect  its  returns  of  annual  net  income  by  the 
stockholder  applying  for  permission  to  make  such  inspection.  The 
privilege  of  inspecting  the  return  of  any  corporation  is  personal  to 
the  stockholders,  and  the  permission  granted  by  the  Secretary  to  a 
stockholder  to  make  such  inspection  cannot  be  delegated  to  any  other 
person. 

5.  The  returns  of  the  following  corporations  shall  be  open  to  the 
inspection  of  any  person  upon  written  application  to  the  Secretary 
of  the  Treasury,  which  application  shall  set  forth  briefly  and  suc- 
cinctly all  facts  necessary  to  enable  the  Secretary  to  act  upon  the 
request: 

(a)  The  returns  of  all  companies  whose  stock  ifl  listed  upon  any  duly  organized  and 
recognised  stock  exchange  within  the  United  States,  for  the  purpose  of  having  its  shares 
dealt  in  by  the  public  generally. 

fb)  All  corporations  whose  stock  is  advertised  in  the  press  or  offered  to  the  public  by 
the  corporation  itself  for  sale.  In  ca9e  of  doubt  as  to  whether  any  company  falls  within 
the  classification  above,  the  person  desiring  to  see  such  return  should  make  application, 
supported  by  advertisements,  prospectus,  or  such  other  evidence  as  he  may  deem  proper 
to  establish  the  fact  that  the  stock  of  such  corporation  is  offered  for  general  public  sale. 


Treasury  Department  Special  Rulings         221 

Returns  can  be  inspected  only  in  the  office  of  the  Commissioner  of 
Internal  Revenue,  in  Washington,  D.  C.  In  no  case  shall  any  col- 
lector, or  any  other  internal  revenue  officer  outside  of  the  Treasury 
Department  in  Washington,  permit  to  be  inspected  any  return  or 
furnish  any  information  whatsoever  relative  to  any  return  or  any 
information  secured  by  him  in  his  official  capacity  relating  to  such 
return,  except  in  answer  to  a  proper  subpoena,  in  a  case  to  which  the 
United  States  is  a  party. 

6.  Returns  of  individuals  shall  not  be  open  to  the  inspection  of 
any  person  other  than  the  proper  officers  and  employees  of  the 
Treasury  Department  or  person  rendering  the  same,  and  are  under 
no  conditions  to  be  made  public,  except  where  such  publicity  shall 
result  through  the  use  of  such  returns  in  any  legal  proceedings  in 
which  the  United  States  is  a  party. 

7.  Upon  request  of  the  Governor  of  a  State  imposing  a  general  in- 
come tax,  the  proper  officer  of  such  State,  to  be  designated  by  name 
and  official  position  by  the  Governor  of  such  State  in  his  application 
to  the  Secretary  of  the  Treasury,  may  have  access  to  the  returns  or 
to  abstracts  thereof  showing  the  name  and  income  of  each  corpora- 
tion, joint-stock  company  or  association,  or  insurance  company,  at 
such  times  and  in  such  manner  as  the  Secretary  of  the  Treasury 
may  prescribe.  Such  application  shall  be  made  in  writing,  addressed 
to  the  Secretary  of  the  Treasury  and  shall  show  (first)  that  the 
State  whose  Governor  makes  the  request  imposes  a  general  income 
tax;  (second)  the  name  and  address  of  each  corporation,  etc.,  to 
which  access  is  desired;  (third)  why  permission  to  inspect  the  re- 
turns of  the  corporations,  etc.,  named  in  the  request  is  desired,  and 
(fourth)  what  officer  or  officers  are  designated  to  make  the  desired 
inspection,  giving  their  names  and  official  designations.  Such  request 
must  be  signed  by  the  Governor  of  the  State  and  sealed  with  the 
seal  thereof,  and  shall  be  transmitted  to  the  Secretary  of  the  Treas- 
ury for  his  consideration  and  action  thereon. 

No  provision  is  made  in  the  law  for  furnishing  a  copy  of  any 
return  to  any  person  or  corporation,  and  no  copy  of  any  return  will 
be  furnished  to  any  other  than  the  person  or  corporation  making  the 
return,  or  their  duly  constituted  attorney,  except  as  hereinbefore 
authorized. 

The  provisions  herein  contained  shall  be  effective  on  and  after  the 
1st  day  of  September.  1914.  w    ft  McAnoo, 

Secretary  of  the  Treasury. 
Approved : 

Woodbow  Wilson, 

The  White  House.  July  38,  191J. 


222  Federal  Income  Tax 

(T.  D.  2017.) 

Nontaxability  of  interest  from  bonds  and  dividends  on  stock  of 
domestic  corporations  owned  by  nonresident  aliens. 

Interest  on  bonds  of  domestic  corporations  and  dividends 
on  stock  of  domestic  corporations  owned  by  nonresident  aliens, 
and  whether  such  bonds  and  stock  be  physically  located  within 
or  without  the  United  States,  are  not  subject  to  the  income 
tax. 


(T.  D.  2022.) 

Waiver  until  further  notice  of  regulation  requiring  the  filling  in  on 
certificates  of  numbers  of  bonds. 

Notice  is  hereby  given  that  regulation  requiring  the  filling 
in  on  certificates  of  numbers  of  bonds  or  other  like  obligations 
of  corporations,  etc.,  from  which  interest  coupons  are  detached 
or  upon  which  registered  interest  is  to  be  paid — which  was 
extended  to  October  31,  1914,  by  T.  D.  1985,  issued  May  28, 
1914 — is  hereby  waived  until  further  notice. 


(T.  D.  2023.) 

Amending  Article  58,  Income  Tax  Regulations  33,  requiring  indorse- 
ment or  stamp  on  foreign  coupons,  checks,  bills  of  exchange, 
etc. 

Article  58,  Income  Tax  Regulations  33,  is  hereby  amended 
to  read  as  follows: 

Article  58.  The  licensed  person,  firm,  or  corporation  first  receiv- 
ing such  foreign  items  for  collection,  or  otherwise,  shall  withhold 
therefrom  the  normal  tax  of  1  per  cent,  and  will  be  held  responsible 
therefor.  If  the  foreign  item  is  in  the  form  of  a  check  or  bill  of  ex- 
change, the  words  "Income  tax  withheld  by  "   (giving  name, 

address,  and  date)    shall  be  indorsed  or  stamped   thereon  by  such 


m 


Treasury  Department  Special  Rulings         223 

licensee;  but  if  the  item  is  represented  by  a  coupon  or  coupons  from 
bonds,  the  licensee  shall  attach  thereto  a  statement  identifying  the 
same,  and  the  indorsement  or  stamp  showing  the  tax  withheld  shall 
be  placed  on  the  statement  instead  of  the  coupon  or  coupons. 

Said  indorsement  or  stamp  shall  be  sufficient  evidence  of  tax  with- 
held to  relieve  subsequent  holders  or  purchasers  from  the  obligations 
of  withholding. 


(T.  D.  2024.) 

Amendment  of  Article  192  of  Regulations  No.  33,  providing  that  col- 
lectors should  not  retain  copies  of  returns  in  their  offices. 

Referring  to  Article  192  of  Regulations  No.  33,  wherein 
it  is  provided  that — 

Where  in  any  case  the  collector  has  reason  to  believe  that  any 
return  rendered  is  false  or  fraudulent,  he  will  prepare  and  retain  in 
his  office  a  copy  of  such  return,  and  will  note  on  the  original  and 
under  the  head  of  "Remarks"  of  his  assessment  list  the  words  "In- 
vestigation pending."  He  will  in  all  such  cases  make  his  investiga- 
tion in  the  manner  prescribed  in  section  3173,  Revised  Statutes,  and 
paragraph  D  of  said  act  of  October  3,  1913;  and  he  will  report  the 
results  of  his  investigation  to  the  Commissioner  of  Internal  Revenue, 
referring  to  the  list,  folio,  and  line  on  which  the  assessment  was 
reported. 

you  are  informed  that  inasmuch  as  these  investigations  are 
to  be  made  by  the  revenue  agents'  force,  the  portion  of  the 
article  of  Regulations  No.  33  quoted  above  is  hereby  annulled. 
Collectors  should  not  under  any  conditions  retain  copies  of 
returns  in  their  offices,  but  when  information  relative  to  any 
return  of  annual  net  income  filed  by  any  taxpayer  is  neces- 
sary in  connection  with  the  assessment  and  collection  of  the 
income  tax  the  same  may  be  secured  from  the  Commissioner 
of  Internal  Revenue  at  Washington. 


224  Federal  Income  Tax 

(T.  D.  2029— See  2090,  page  21.) 

Corporations  desiring  to  make  returns  ot  annual  net  income  on  the 
basis  of  a  fiscal  year  must,  not  less  than  30  days  prior  to  the 
first  day  of  March,  give  notice  in  writing  to  the  collector,  desig- 
nating in  such  notice  the  last  day  of  some  month  as  the  close  of 
the  fiscal  year,  in  which  case  the  fiscal  year  return  will  cover  a 
12-months  period.  The  return  for  that  portion  of  the  calendar 
year  preceding  the  beginning  of  the  fiscal  year  will  be  filed  on 
or  before  March  next  following. 

Reference  is  made  to  T.  D.  2001,  relative  to  the  designa- 
tion by  corporations  of  a  fiscal  year  other  than  a  calendar 
year  as  a  basis  for  making  returns  of  annual  net  income. 

You  are  informed  that  every  corporation  amenable  to  the 
income-tax  law  in  existence  at  the  close  of  a  calendar  year  is 
required  to  file  a  return  covering  all  or  any  part  of  the  pre- 
ceding calendar  year  during  which  it  may  have  been  in  ex- 
istence on  or  before  March  1,  provided  such  corporation  has 
not  established  or  does  not  establish  a  fiscal  year. 

In  order  to  establish  a  fiscal  year  it  is  necessary  for  the 
corporation  to  give  notice  to  you  in  writing  designating  the 
last  day  of  some  month  as  the  close  of  its  fiscal  year.  This 
notice  must  be  filed  not  less  than  30  days  prior  to  March  1 
of  the  year  in  which  the  fiscal-year  period  of  12  months  closes. 
A  return  for  that  portion  of  the  calendar  year  preceding  the 
commencement  of  the  fiscal  period  of  12  months  is  required 
to  be  filed  on  or  before  March  1  of  the  year  next  following 
the  calendar  year  of  which  it  is  a  part,  and  the  return  for  the 
first  full  fiscal  year  is  required  to  be  filed  on  or  before  the  last 
day  of  the  60-day  period  following  the  close  of  the  fiscal  year. 

Example:  A  corporation  desiring  to  establish  its  fiscal 
year  as  ending  on  June  30,  1915,  must  file  notice  not  less  than 
thirty  (30)  days  prior  to  March  1,  1915,  on  or  before  Janu- 
ary 29,  1915.  A  return  for  the  period  January  1  to  June  30, 
1914,  must  then  be  filed  on  or  before  March  1,  1915,  and  a 
return  for  the  first  fiscal  year  period  (July  1,  1914,  to  June 
30,  1915)  must  be  filed  on  or  before  August  29,  1915. 


Treasury  Department  Special  Rulings         225 

That  portion  of  the  year  preceding  the  beginning  of  an 
established  fiscal  year  is  held  to  be  a  fractional  part  of  the 
calendar  year,  and  as  the  return  of  a  calendar  year  is  not 
required  to  be  filed  until  on  or  before  the  first  day  of  March 
next  following,  there  is  no  provision  of  law  whereby  the 
return  covering  a  fraction  of  a  calendar  year  is  required  to 
be  filed  earlier  than  "on  or  before"  the  next  March  1st,  though 
it  is  preferred  that  the  return  for  this  fraction  shall  be  filed 
as  early  as  possible  after  the  close  of  the  period. 

The  above  instructions  are  supplemental  to  T.  D.  2001,  and 
rulings  or  decisions  heretofore  issued  in  conflict  with  the  fore- 
going are  hereby  revoked. 


(T.  D.  2048— See  Revision  T.  D.  2163.) 

Taxable  status  of  dividends  paid  on  the  capital  stock  from  the  cur- 
rent net  earnings  or  established  surplus  created  from  the  net 
earnings  of  corporations,  joint-stock  companies  or  associations, 
and  insurance  companies  taxable  upon  their  net  income. 

Dividends  from  the  net  earnings  or  established  surplus 
created  from  the  net  earnings  of  any  corporation,  joint-stock 
company  or  association,  and  insurance  company  are  vested  in 
the  stockholder  on  the  date  on  which  such  dividends  are  de- 
clared, whether  distributed  or  not,  and  regardless  of  the  time 
when  the  surplus  or  undivided  profits  from  which  such  divi- 
dends are  declared  were  earned  and  entered  on  the  books  of 
the  corporation  as  such.  Dividends  so  declared  should  be 
accounted  for  in  full  in  the  returns  of  income  of  individuals 
for  the  year  in  which  they  became  due  and  payable,  whenever 
the  amount  of  income  is  sufficient  to  require  the  inclusion  of 
dividends,  as  provided  in  paragraph  D  of  the  income-tax  law 
and  T.  D.  1945,  and  should  be  included  in  the  gross  income 
of  corporations,  etc.,  regardless  of  the  amount  of  income. 

All  decisions  and  regulations  which  are  in  conflict  herewith 
are  hereby  revoked. 
15 


226  Federal  Income  Tax 

(T.  D.  2049.) 

Emergency  Revenue   Law — Income-tax   Certificates. 

Income-tax  certificates  which  are  not  required  by  specific  statute,  but 
by  regulations  only,  are  not  subject  to  tax  as  "certificates  re- 
quired by  law"  under  act  of  October  22,  1914. 

In  reply  to  your  verbal  inquiry  as  to  whether  certificates  of 
ownership,  certificates  of  exenrption,  and  other  certificates 
required  by  the  income-tax  regulations,  but  not  by  specific 
statute,  are  subject  to  tax  as  certificates  required  under  the 
internal-revenue  act  of  October  22,  1914,  I  beg  to  advise  you 
that  they  are  not. 

While  regulations  made  pursuant  to  and  under  authority 
of  law  as  a  rule  have  the  force  and  effect  of  law,  it  is  held  by 
this  office  that  it  was  not  the  intent  of  Congress  to  tax  certifi- 
cates which  are  required  by  regulations  of  the  department  for 
its  own  purposes  and  not  by  any  express  provision  of  law. 


(T.  D.  2077.) 

The  gain  or  loss  resulting  from  the  sale  of  capital  assets  and  appor- 
tioned to  the  years  subsequent  to  January  1,  1909,  should  be  in- 
creased or  decreased  accordingly  as  there  was  gain  or  loss  by 
the  amount  of  depreciation  charged  off  since  January  1,  1909, 
and  not  used  to  make  good  such  depreciation. 

Article  110,  page  66,  of  Regulations  No.  33,  should  be,  and 
is  hereby,  amended  to  read  as  follows : 

Art.  110.  For  the  purpose  of  determining  the  amount  of  profit  or 
loss  arising  from  the  sale  of  capital  assets  acquired  prior  to  January 
1,  1909,  which  shall  be  taken  into  account  by  corporations  in  making 
their  returns  of  annual  net  income,  the  gain  or  loss  represented  by 
the  difference  between  the  purchase  price  and  the  selling  price  shall 
be  prorated  according  to  the  number  of  years  the  assets  were  held 
prior  to  their  sale,  and  the  amount  thus  apportioned  or  apportion- 
able  to  the  years  subsequent  to  January  1,  1909,  shall  be  included  in 
or  deducted  from  the  gross  income  of  the  year  in  which  the  assets 
were  sold,  accordingly  as  they  were  sold  for  more  or  less  than  their 


Treasury  Department  Special  Rulings         227 

original  cost.  To  any  gain  thus  apportioned  and  to  be  included  in 
income  there  should  be  added  any  amount  or  amounts  which  had 
been  charged  against  and  deducted  from  gross  income  during  the 
years  since  the  inception  of  the  special  excise  tax  law,  on  account  of 
depreciation  and  which  had  not  been  paid  out  in  making  good  the 
depreciation — that  is,  any  amount  charged  off  subsequent  to  January 
1,  1909,  on  account  of  the  depreciation  of  the  assets  sold  and  not 
used  to  make  good  such  depreciation  shall  be  added  to  the  gain 
apportioned  to  these  years  and  will  be  included  in  the  income  of  the 
year  in  which  the  property  was  sold.  Likewise,  for  the  purpose  of  a 
deduction  from  gross  income  of  the  year  in  which  the  assets  were 
sold,  loss  resulting  from  any  such  sale,  apportionable  to  the  years 
subsequent  to  January  1,  1909,  will  be  reduced  by  the  amount  of  the 
unused  portion  of  the  depreciation  charged  off  with  respect  to  such 
assets  since  January  1,  1909. 

This  ruling,  in  so  far  as  it  relates  to  depreciation,  applies 
only  to  such  tangible  property  as  is  subject  to  wear  and  tear, 
exhaustion  and  obsolescence,  and  is  not  to  be  construed  as 
recognizing  any  gain  or  loss  due  to  fluctuations  in  the  market 
value  or  arbitrary  changes  in  the  book  value  of  securities  and 
like  assets,  the  gain  or  loss  with  respect  to  which  will  be 
determined  only  when  such  assets  mature  or  are  sold  or  dis- 
posed of — that  is,  when  there  is  a  completed,  a  closed,  trans- 
action.    (See  T.  D.  2005.) 


(T.  D.  2079.) 

Income  tax  liability  and  withholding  requirements  in  connection 
with  quarters,  heat  and  light,  mileage,  reimbursements  for 
actual  expenses,  and  per  diem  allowances  in  lieu  of  subsistence 
while  traveling  under  orders,  furnished  or  paid  by  the  Govern- 
ment to  officers  and  employees. 

All  decisions  and  regulations  which  are  in  conflict  with  the 
holdings  that  follow  are  hereby  revoked. 

(A)  Income  Tax  Liability. 

(1)  Quarters. — Commutation  of  quarters  and  the  money 
equivalent  of  quarters  furnished  in  kind  shall  be  returned  as 
income. 


228  Federal  Income  Tax 

When  quarters  are  furnished  in  kind,  of  a  less  number  of 
rooms  than  the  number  allowed  by  law,  the  money  equivalent 
only  of  the  number  of  rooms  actually  assigned  shall  be  re- 
turned as  income.  When  quarters  are  furnished  in  kind,  of  a 
greater  number  of  rooms  than  the  number  allowed  by  law,  it 
is  to  be  assumed  that  the  excess  number  is  assigned  for  the 
convenience  of  the  Government,  and  the  money  equivalent 
only  of  the  number  of  rooms  allowed  by  law  shall  be  returned 
as  income. 

(2)  Heat  and  Light. — Amounts  received  by,  or  paid  for, 
an  officer  for  heat  and  light  shall  be  returned  as  income. 

This  includes  the  money  equivalent,  as  fixed  by  the  Gov- 
ernment, of  heat  and  light  furnished  to  an  officer  occupying 
public  quarters. 

(3)  Mileage. — The  difference  between  the  amount  received 
as  mileage  and  the  amount  of  actual  necessary  expenses  in- 
curred on  a  journey  shall  be  returned  as  income. 

Mileage,  as  such,  is  not  gain,  profit,  or  income  to  the  officer, 
as  he  is  required  to  pay  his  actual  expenses  while  traveling 
under  mileage  orders.  The  gain,  profit,  or  income  is  the 
difference  between  the  amount  received  as  mileage  and  the 
amount  properly  expended  by  the  officer  while  traveling,  and 
this  difference  only  should  be  returned  as  income. 

The  actual  expenses  to  be  deducted  by  the  individual  before 
ascertaining  his  gain,  profit,  or  income  on  account  of  mileage 
are  the  expenses  for  which  reimbursement  would  be  made  by 
the  Government  if  he  had  traveled  on  an  actual  expense  basis 
instead  of  a  mileage  basis. 

(4)  Reimbursement  for  Actual  Expenses. — Amounts  paid 
by  the  Government  in  the  nature  of  reimbursement  for  sub- 
sistence and  other  items  of  actual  expenses  incurred  while 
absent  on  business  for  the  Government  are  not  required  to  be 
returned  as  income. 

(5)  Per  Diem  Allowances  in  Lieu  of  Subsistence  While 
Traveling  Under  Orders. — The  difference  between  the  amount 
received  as  a  per  diem  allowance  and  the  amount  of  actual 
necessary  expenses  incurred  on  a  journey  shall  be  returned 
as  income. 


Treasury  Department  Special  Rulings         229 

(B)    Withholding  Requirements. 

Payments  in  connection  with  (1)  quarters,  (2)  heat  and 
light,  (3)  mileage,  (4)  reimbursement  for  actual  expenses, 
and  (5)  per  diem  allowances  in  lieu  of  subsistence  while 
traveling  under  orders  are  indefinite  and  irregular  as  to  right 
of  possession,  amount,  and  time  of  accrual,  and  are  not,  there- 
fore, subject  to  withholding  as  "fixed  or  determinable  annual 
or  periodical  gains,  profits,  and  income"  under  the  require- 
ments of  the  income-tax  law. 


(T.  D.  2090.) 

Synopsis  of  rulings  on  questions  relating  to  the  income  tax  imposed 
by  section  2  of  the  act  of  October  3,  1913. 

The  following  synopsis  of  rulings  on  questions  relating  to 
the  income  tax  imposed  by  section  2  of  the  act  of  October  3, 
1913,  on  individuals,  corporations,  joint-stock  companies, 
associations,  and  insurance  companies,  is  published  for  the 
information  of  interna  1-re venue  officers  and  others  concerned. 
All  rulings  or  parts  of  rulings  heretofore  made  which  are  in 
conflict  herewith  are  hereby  revoked. 

Part  I. 

RULINGS  IN   RELATION   TO  PERSONAL   INCOME  TAX. 

Actors  and  Actresses. — If  costumes  purchased  by  actors 
and  actresses  are  used  exclusively  in  the  production  of  a  play, 
and  are  not  adapted  for  occasional  personal  use  and  are  not 
so  used,  a  deduction  may  be  claimed  on  account  of  such  de- 
preciation in  their  value  as  occurs  during  the  year  on  account 
of  wear  and  tear  arising  from  their  use  in  the  productions  of 
the  play  or  to  their  becoming  obsolete  at  the  close  of  the  pro- 
duction. 

Administration  of  estates,  expenses  of. — Expenses  of  ad- 
ministration of  an  estate,  such  as  court  costs,  attorneys'  fees, 
executors'  commissions,  etc.,  are  chargeable  against  the  corpus 


230  Federal  Income  Tax 

of  the  estate  and  are  not  allowable  deductions  in  a  return  of 
a  fiduciary  on  Form  1041. 

Administrators. — See  Executors  and  administrators. 

Agent. — The  word  "agents"  as  used  in  paragraphs  D  and  E 
of  the  income-tax  law  in  connection  with  the  words  "control, 
receipt,  custody,  disposal  or  payment  of  income  to  another 
person,"  does  not  relate  to  agents  not  acting  in  a  fiduciary 
capacity.  Agents  not  acting  in  a  fiduciary  capacity  have  no 
responsibility  with  reference  to  withholding  the  tax  on,  or 
making  a  return  of,  income  turned  over  to  resident  aliens  or 
citizens  of  the  United  States;  but  the  responsible  heads, 
agents,  or  representatives  of  nonresident  aliens  who  are  in 
charge  of  property  owned,  business  carried  on,  or  capital 
invested  within  the  United  States  shall  make  full  and  com- 
plete returns  of  the  income  therefrom  on  Form  1040,  re- 
vised, and  pay  the  tax  thereon.  See  Nonresident  alien, 
agent  of. 

Agent,  real  estate. — See  Real  estate  agent. 

Agent  for  nonresident  alien, — See  Nonresident  alien, 
agent  of. 

Aids'  pay. — See  Pay. 

Alimony. — Alimony  is  regarded  as  fixed  and  determinable 
income,  and  in  cases  where  it  is  in  excess  of  $3,000  the  per- 
son paying  such  alimony  is  required  to  withhold  the  normal 
tax  on  the  same  unless  exemption  is  claimed  under  paragraph 
C,  in  which  case  the  normal  tax  will  be  withheld  only  on  the 
amount  paid  in  excess  of  the  exemption  claimed.  It  must  be 
accounted  for  as  income  if,  together  with  other  income,  the 
recipient  is  in  receipt,  of  a  net  income  of  $3,000  or  more.  It 
is  regarded  as  a  personal  expense  to  the  person  paying  it  and 
is,  therefore,  not  an  allowable  deduction  in  his  return. 

Annuity. — The  amount  paid  under  a  life  insurance,  en- 
dowment, or  annuity  contract  is  not  income  when  returned 
to  the  person  making  the  contract,  either  upon  the  maturity 
or  surrender  of  the  contract;  but  the  amount  by  which  the 
sum  received  exceeds  the  sum  paid  and  coming  into  the  hands 
of  the  person  making  the  contract  and  payment  is  income. 


Treasury  Department  Special  Rulings         231 

When  the  settlement  under  such  a  contract  is  made  in  more 
than  one  payment  each  payment  will  be  considered  as  being 
composed  of  interest  and  a  proportionate  part  of  the  prin- 
cipal. Where  the  entire  annuity  is  composed  of  an  interest 
return  upon  the  principal  sum  paid  therefor,  the  entire  an- 
nuity is  income.      (Amended  T.  D.  2152.) 

Assessments  on  stock. — Assessments  made  by  a  corporation 
on  its  capital  stock  are  regarded  as  an  investment  of  capital 
and  do  not  constitute  an  allowable  deduction  in  the  return 
of  the  individual. 

Bad  debt. — See  Debt. 

Beneficiary. — A  beneficiary  is  liable  for  the  normal  tax 
upon  the  amount  of  net  income  derived  by  him  from  a  taxable 
source  through  a  fiduciary,  less  the  amount  of  exemption 
claimed  and  the  amount  of  income  on  which  the  normal  tax 
has  been  withheld  at  source,  and  is  also  liable  for  the  addi- 
tional tax  assessable  on  the  amount  of  net  income  received 
by  him  in  excess  of  $20,000 ;  and  in  order  to  determine 
whether  the  net  income  of  a  beneficiary  is  or  is  not  in  excess 
of  $20,000  and  subject  to  the  additional  tax,  the  amount  de- 
rived by  him  from  an  estate  and  all  other  taxable  sources  is 
required  to  be  shown  on  his  personal  annual  return. 

Board  of  education,  requirements  of,  with  reference  to 
withholding.- — See  Rent. 

Bond,  premium  on. — Where  an  employee  is  required  to 
furnish  bond  and  pay  the  premium  on  such  bond,  as  a  neces- 
sary incident  of  his  employment,  the  premium  on  the  bond 
will  constitute  an  allowable  deduction  in  computing  net  in- 
come. 

Bonds  containing  tax-free  covenant  clause. — The  stipula- 
tion in  bonds  whereby  the  tax  which  may  be  assessed  against 
them,  or  the  income  therefrom  is  guaranteed,  is  a  contract 
wholly  between  the  corporation  and  the  bondholder,  and  in 
so  far  as  the  income-tax  law  applies,  the  Government  will 
not  differentiate  between  coupons  from  bonds  of  this  char- 
acter and  those  from  bonds  carrying  no  such  guaranty.  The 
debtor  corporation  or  its  duly  authorized  withholding  agent 


232  Federal  Income  Tax 

will  be  held  responsible  for  the  normal  tax  due  in  such  cases 
when  no  exemption  is  claimed.  When  coupons  are  accom- 
panied by  certificates  of  ownership  in  which  no  exemption 
is  claimed,  the  income  from  such  coupons  may  be  included 
in  the  return  of  the  individual  (under  column  A,  p.  2,  of 
Form  1040,  revised)  as  income  upon  which  the  normal  tax 
of  1  per  cent  has  been  paid  or  is  to  be  paid  at  the  source. 
(T.  D.  1948.) 

Bonds,  interest  on. — The  exchange  of  interest  coupons  for 
funding  bonds  is  a  payment  of  interest  on  the  bonds  and  the 
income  tax  should  be  imposed  and  paid  upon  such  interest  as 
income  for  the  year  in  which  it  matures  and  such  payment  is 
made,  and  in  the  absence  of  proper  claim  for  exemption  the 
tax  should  be  deducted  and  withheld  on  the  amount  repre- 
sented by  the  coupons. 

Book  value. — Book  values  which  reflect  a  shrinkage  in  the 
value  of  assets  are  not  a  basis  for  determining  taxable  income. 
(T.  D.  2005.) 

Certificate  of  merit,  pay  for. — See  Pay. 

Certificate  of  ownership. — -Where  bonds,  under  contract 
provisions  in  the  bonds,  are  retired  within  an  interest  period 
and  prior  to  the  expiration  of  the  full  term  of  the  bond,  own- 
ership certificates  will  be  required  and  should  cover  that  part 
of  the  interest  period  affected  between  the  beginning  of  such 
period  and  the  date  of  the  retirement  of  the  bonds. 

Certificates. — The  department  will  furnish  blank  forms  of 
certificates  to  be  used  in  connection  with  the  collection  of  the 
income  tax  by  such  parties  as  may  make  application  for  the 
same.  Private  corporations  and  others  desiring  to  have 
these  certificates  printed  for  themselves  may  do  so  if  they 
will  strictly  observe  the  requirements  of  the  department  as  to 
size,  print,  form,  color,  and  contents. 

Certificates  to  be  used  in  claiming  exemption  from  with- 
holding on  income  derived  from  foreign  sources. — See  Income 
derived  from  coupons,  checks,  etc. 

Citizenship. — An  American  woman  who  marries  a  for- 
eigner takes  the  nationality  of  her  husband  and  can  not  claim 
exemption  under  paragraph  0. 


Teeasuey  Depaetment  Special  Rulings         233 

Clubs. — All  clubs  are  not  exempt  from  the  provisions  of 
the  income-tax  law,  even  though  not  operated  for  profit.  A 
club  desiring  to  be  registered  as  an  exempt  organization 
should  file  with  the  Commissioner  of  Internal  Revenue  a 
copy  of  its  charter,  or  an  affidavit  of  its  principal  officer,  set- 
ting forth  the  nature  of  its  organization,  the  purpose  for 
which  organized,  the  source,  if  any,  from  which  it  derives 
income,  and  the  disposition  made  of  such  income  as  is  re- 
ceived by  it  for  consideration  and  determination  as  to  whether 
or  not  it  comes  within  the  class  of  organizations  held  to  be 
exempt  under  the  provisions  of  paragraph  G  of  the  income- 
tax  law. 

Commission. — A  commission  paid  to  a  real  estate  agent 
for  collecting  rents  and  management  of  property  is  a  legiti- 
mate business  expense  and  constitutes  an  allowable  deduc- 
tion in  computing  net  income. 

Commission  on  renewal  premium, — See  Renewal  premium. 

Commissions. — See  Compensation. 

Commissions  paid  salesmen. — Commissions  paid  to  sales- 
men as  a  part  of  the  expense  of  conducting  business  are 
allowable  deductions  to  the  payer  of  the  commission.  Such 
commissions,  however,  are  income  and  should  be  accounted 
for  in  the  return  of  the  person  receiving  them.  When  indefi- 
nite as  to  amount  and  time  of  accrual,  they  are  not  subject- 
to  withholding. 

Commutation  of  heat  and  light. — Amounts  paid  on  ac- 
count of  commutation  of  heat  and  light  are  not  subject  to 
withholding.     (T.  D.  2079.) 

Continuation  of  quarters. — Payments  made  on  account  of 
commutation  of  quarters  are  not  subject  to  withholding. 
(T.  D.  2079.) 

Compensation. — (1)  A  person  receiving  a  salary  in  excess 
of  $4,000,  and,  in  addition,  a  commission  of  1  per  cent  on 
all  sales,  the  exact  amount  due  on  account  of  commissions  not 
being  determinable  until  February  following  the  year  in 
which  the  commissions  were  earned,  at  which  time  both  his 
salary  for  the  preceding  year  and  his  commissions  are  paid 


234  Federal  Income  Tax 

to  him,  should  return  as  income,  for  the  year  in  which  pay- 
ment was  made,  the  aggregate  amount  received  on  account  of 
salary  and  commissious.  The  normal  tax  should  be  deducted 
and  withheld  therefrom  when  the  combined  payments  of 
salary  and  commissions  aggregate  in  excess  of  $3,000,  sub- 
ject to  authorized  exemption  claimed.  The  normal  tax  de- 
ducted from  these  payments  should  be  accounted  for  on  the 
withholding  agent's  return,  Form  104-2,  for  the  year  in 
which  the  deductions  were  made. 

(2)  Where  an  employee  is  paid  a  sum  equal  to  two  years' 
salary  on  condition  that  he  surrender  his  contract  of  employ- 
ment, such  sum  should  be  reported  by  him  on  his  annual  re- 
turn as  income,  and  if  the  sum  paid  exceeds  $3,000,  the  nor- 
mal tax  should  be  deducted  and  withheld  therefrom,  subject 
to  authorized  exemption  claimed. 

(3)  When  profits  distributed  by  a  corporation  to  an  em- 
ployee, together  with  payments  of  the  employee's  salary, 
aggregate  in  excess  of  $3,000,  the  normal  tax  should  be 
deducted  and  withheld  therefrom,  subject  to  authorized  ex- 
emption claimed. 

Compensation  for  service  upon  an  annual,  monthly,  or 
weekly  basis. — Where  a  service  and  payment  period  is  divided 
by  the  end  of  a  taxable  year,  the  compensation  for  the  period 
so  divided  at  the  end  of  the  year  will  be  accounted  for  in 
the  return  for  the  year  in  which  payment  is  made  and  re- 
ceived. Where  the  service  is  of  such  nature  as  to  be  com- 
pensated by  fee,  or  of  such  nature  that  no  portion  of  the 
amount  becomes  due  until  the  service  is  completed,  then  the 
total  amount  of  the  compensation  should  be  included  in  the 
return  for  the  year  in  which  the  compensation  is  received. 

Compensation,  value  of  quarters  furnished,  part  of. — 
Where  an  individual  is  furnished  living  quarters  in  addition 
to  salary,  the  rental  value  of  such  living  quarters  is  re- 
garded as  compensation  subject  to  the  income  tax. 

Corporation  notes  for  a  period  of  one  year  or  less. — See 
Promissory  note  of  corporations. 


Treastjey  Depaetment  Special  Rulings         235 

Corporations,  equipment  trust  notes  of. — See  Equipment 
trust  notes. 

Corporations,  obligations  of. — Obligations  of  corporations 
similar  to  bonds,  mortgages,  deeds  of  trust,  etc.,  for  income- 
tax  purposes  are  beld  to  be  tbose  obligations  of  corporations 
which,  though  not  bonds,  mortgages,  or  deeds  of  trust,  are 
similar  in  form,  purpose,  or  in  being  extended  beyond  the 
time  of  ordinary  bankable  commercial  paper.  Interest  pay- 
ments on  ordinary  bankable  commercial  paper  of  corpora- 
tions payable  to  individuals  are  subject  to  withholding  at  the 
source  only  when  the  payment  to  any  one  individual  within 
a  taxable  year  exceeds  $3,000.  On  all  other  obligations  of 
corporations,  etc.,  payable  to  individuals,  interest  payments 
are  subject  to  withholding  regardless  of  the  amount  of  in- 
terest payment.  See  Mortgage,  property  purchased  subject 
to. 

Corporations,  principal  place  of  business  of. — The  prin- 
cipal place  of  business  of  a  corporation  is  the  place  or  office 
in  which  are  kept  the  books  of  account  and  other  data  from 
which  the  return  is  to  be  prepared. 

Corporations,  property  purchased  by,  subject  to  mortgage. 
— See  Mortgage,  property  purchased  subject  to. 

Corporations,  residence  of. — Corporations  whose  business 
is  done  wholly  in  Porto  Rico  and  the  Philippine  Islands,  even 
though  incorporated  in  the  United  States,  are  held  to  be  res- 
ident corporations  of  these  possessions,  and  will  make  returns 
and  pay  the  income  tax  to  the  collectors  of  internal  revenue 
having  jurisdiction  there. 

Costumes. — See  Actors  and  actresses. 

Debt. — A  bad  or  worthless  debt,  as  contemplated  by  the 
income-tax  law,  and  which  may  be  deducted  in  a  return  of 
income,  is  a  debt  which  has  been  actually  ascertained  to  be 
worthless  and  charged  off  within  the  taxable  year. 

Decedent,  return  of  a. — See  Executors  and  administrators. 

Deductions,  paragraph  B. — (1)  Necessary  expenses  actu- 
ally paid  in  carrying  on  any  business,  not  including  personal, 
living,  or  family  expenses. 


236  Federal  Income  Tax 

(2)  All  interest  paid  within  the  year  by  a  taxable  person 
on  indebtedness. 

(3)  All  National,  State,  county,  school,  and  municipal 
taxes  paid  within  the  year,  not  including  those  assessed 
against  local  benefits. 

(4)  Losses  actually  sustained  during  the  year  incurred  in 
trade  or  arising  from  fires,  storms,  or  shipwreck  and  not 
compensated  for  by  insurance  or  otherwise. 

(5)  Debts  due  to  the  taxpayer  actually  ascertained  to  be 
worthless  and  charged  off  within  the  year. 

(6)  A  reasonable  allowance  for  the  exhaustion  and  wear 
and  tear  of  property  arising  out  of  its  use  or  employment  in 
the  business  not  to  exceed,  in  the  case  of  mines,  5  per  cent 
of  the  gross  value  at  the  mine  of  the  output  for  tbe  year  for 
which  the  computation  is  made ;  but  no  deduction  shall  be 
made  for  any  amount  of  expense  of  restoring  property  or 
making  good  the  exhaustion  thereof  for  which  an  allowance 
is  or  has  been  made;  provided  that  no  deduction  shall  be 
allowed  for  any  amount  paid  out  for  new  buildings,  perma- 
nent improvements,  or  betterments  made  to  increase  the 
value  of  any  property  or  estate.  (See  paragraph  B,  sec.  2, 
act  of  October  3,  1913.) 

Depreciation-. — See  Actors  and  actresses. 

Dividends  declared  by  foreign  corporations  transacting 
business  wholly  within  the  United  States. — See  Foreign  cor- 
porations, property  owned  and  business  transacted  wholly 
within  the  United  States. 

Drainage,  irrigation,  and  reclamation  districts,  interest  on 
bonds  of. — See  Special  assessment  districts. 

Employees,  foreign,  of  domestic  corporations. — See  For- 
eign employees  of  domestic  corporations. 

Equipment  trust  notes. — Equipment  trust  notes  secured 
by  mortgage  issued  by  a  corporation  are  subject  to  withhold- 
ing. Temporary  receipts  issued  pending  preparation  and 
issue  of  the  notes  themselves  stand  in  the  place  of  the  notes, 
and  where  an  interest  period  intervenes  and  receipts  are  to 
l>e  presented  for  indorsement  thereon  of  a  payment  of  interest, 


Treasury  Department  Special  Rulings         237 

requisite  certificates  of  ownership  claiming  or  not  claiming 
exemption  should,  be  filed. 

Executors  and  administrators. — If  the  net  income  of  a  de- 
cedent from  January  1  of  the  year  in  which  he  died  to  the 
date  of  his  death  was  $3,000  or  over,  a  return  for  such  de- 
cedent must  be  made  by  the  executor  or  administrator  on 
Form  1040,  revised,  and  such  executor  or  administrator  may 
claim  all  deductions  and  exemption  to  which  the  decedent 
would  have  been  entitled  under  the  law. 

Exempt  organizations. — Any  organization  which  has  been 
held  by  the  Commissioner  of  Internal  Revenue  to  come  with- 
in the  class  of  organizations  enumerated  in  paragraph  G  of 
the  income-tax  law  is  not  required  to  deduct  and  withhold 
the  normal  tax  from  the  amount  of  any  salary  or  interest 
paid  by  it,  and  it  is  subject  to  no  requirements  of  said  law. 
However,  the  owner  of  bonds  issued  by  such  an  organization 
is  not  relieved  from  the  filing  of  certificates  of  ownership, 
with  coupons  detached  from  such  bonds  when  presenting 
same  to  a  bank  or  other  collecting  agency  for  collection  or 
otherwise,  or  to  the  debtor  corporation  or  its  duly  designated 
paying  agent  for  payment ;  and  while  such  an  organization  as 
the  source  of  income  is  under  no  obligation  to  withhold  the 
tax  in  cases  where  no  exemption  is  claimed,  it  should,  never- 
theless, forward  with  a  letter  of  transmittal  such  certificates 
as  are  received  by  it  to  the  collector  of  internal  revenue  for 
its  district  on  or  before  the  20th  day  of  the  month  next  suc- 
ceeding that  in  which  the  said  certificates  were  received. 
No  special  form  of  certificate  has  been  issued  for  presenta- 
tion with  coupons  detached  from  bonds  of  exempt  organiza- 
tions, but  certificates  in  the  usual  form,  claiming  or  not  claim- 
ing exemption,  may  be  used.      (T.  D.  1967.) 

Where  such  organizations  have  an  issue  of  registered  bonds, 
they  should,  before  sending  out  cheeks  issued  in  payment 
of  registered  interest,  stamp  or  write  across  the  face  of  such 
check,  "Corporation  exempt  under  paragraph  G  from  with- 
holding;" otherwise  the  first  bank  or  collecting  agent  would 
deduct  and  withhold  the  normal  tax  therefrom. 


238  Federal  Income  Tax 

Exempt  organizations,  salaries  paid  by. — Salaries  paid  by 
corporations  which  corporations  have  been  held  to  be  exempt 
from  the  income  tax  under  paragraph  G  of  the  income-tax 
law,  are  subject  to  the  income  tax  and  should  be  returned 
as  income  by  the  individual,  but  the  corporation  is  not  re- 
quired to  withhold  the  tax. 

Exemption  and  deductions  allowed  in  the  return  of  a  dece- 
dent.— See  Executors  and  administrators. 

Exemption,  husband  and  wife. — See  Husband  and  wife. 

Exemption  on  income  received  from  partnerships. — See 
Partnerships,  identity  of  income. 

Expense. — Taxes  paid  by  a  tenant  to  a  landlord  are  con- 
sidered as  additional  payment  for  rent  and  are  deductible  as 
an  expense  of  carrying  on  business. 

Failure  to  render  a  return,  penalty  for. — Every  person 
having  a  net  income  of  $3,000  or  more  for  the  calendar  year 
is  required  to  render  a  return,  and  the  penalty  provided  by 
law  for  refusal  or  neglect  to  file  a  return  will  be  enforced  re- 
gardless of  the  fact  that  the  net  income  may  be  less  than  the 
exemption  to  which  the  individual  is  entitled. 

Farm  buildings,  depreciation  of. — Depreciation  of  farm 
buildings,  other  than  a  dwelling  occupied  by  the  owner,  ac- 
tually sustained  within  the  year  in  excess  of  repairs  made, 
will  be  considered  an  allowable  deduction. 

Fiduciary. — "Fiduciary"  is  a  term  which  applies  to  all 
persons  or  corporations  that  occupy  positions  of  peculiar  con- 
fidence toward  others,  such  as  trustees,  executors,  or  admin- 
istrators ;  and  a  fiduciary,  for  income-tax  purposes,  is  any  per- 
son or  corporation  that  holds  in  trust  an  estate  of  another 
person  or  persons. 

There  may  be  a  fiduciary  relationship  between  an  agent 
and  a  principal;  but  the  word  "agent"  does  not  denote  a 
"fiduciary"  within  the  meaning  of  the  income-tax  law. 

Fiduciary,  return  of. — Fiduciaries  are  required  to  make  a 
return  on  Form  1041,  revised,  whenever  the  interest  of  any 
one  beneficiary  in  the  income  from  the  estate  or  trust  sub- 
ject to  the  normal  tax  is  in  excess  of  $3,000.     This  duty  can 


Treasury  Department  Special  Rulings         239 

not  be  delegated  to  another  person.  When  the  interest  of  any 
one  beneficiary  exceeds  $3,000  and  a  return  is  required,  the 
name  and  full  address  of  each  beneficiary  and  the  share  of 
income  to  which  entitled,  even  though  it  be  less  than  $3,000. 
must  be  shown ;  and  in  all  cases  where  the  beneficiary's  inter- 
est is  in  excess  of  $3,000  the  fiduciary  is  required  to  with- 
hold the  normal  tax  unless  exemption  is  claimed  under  para- 
graph Cj  and  then  only  on  the  amount  in  excess  of  the  exemp- 
tion so  claimed. 

A  fiduciary  acting  for  a  beneficiary  in  more  than  one  estate 
or  trust  is  required  to  account  for  each  estate  separately, 
and  if  the  amount  of  income  from  no  one  estate  exceeds 
$3,000  no  return  or  withholding  will  be  required.  Unless  the 
beneficiary  is  under  some  disability  which  requires  the  fidu- 
ciary to  act,  the  beneficiary  will  make  his  own  return  and  ac- 
count for  the  tax  upon  his  entire  net  income. 

A  fiduciary  acting  for  a  minor  or  insane  person  having  a 
net  income  in  excess  of  $3,000  will  make  the  return  for  his 
ward  on  Form  1040,  revised,  and  will  not  lie  required  to  file 
a  return  on  Form  1041,  revised,  unless  he  has  more  than  one 
ward  by  reason  of  the  same  estate  or  trust.  Then,  in  that 
event,  a  return  will  be  required  on  Form  1041,  revised,  and  a 
separate  return  on  Form  1040  for  each  ward  having  a  net 
income  of  $3,000  or  more  for  the  calendar  year. 

Dividends  in  the  hands  of  a  fiduciary  and  belonging  to  a 
beneficiary  are  not  subject  to  the  normal  tax,  but  will  be  sub- 
ject to  the  additional  tax  to  the  beneficiary  whenever  the 
beneficiary's  income  from  all  taxable  sources  is  in  excess  of 
$20,000.     (T.  D.  1943.) 

Fire-insurance  policy,  premiums  paid  on. — See  Insurance 
premium. 

Foreign  corporations,  interest  on  bonds  of. — See  Income 
derived  from  coupons,  checks,  etc. 

Foreign  corporations,  property  owned  and  business  trans- 
acted wholly  within  the  United  States. — Dividends  declared 
and  paid  by  a  foreign  corporation  which  derives  its  entire  in- 
come from  business  done  wholly  within  the  United  States 


240  Federal  Income  Tax 

and  pays,  under  the  provisions  of  the  Federal  income-tax  law, 
a  tax  upon  its  net  income,  should  be  treated  in  the  same  man- 
ner as  dividends  from  domestic  corporations. 

Foreign  employees  of  domestic  corporations. — Salary  re- 
ceived by  a  foreign  employee  of  a  domestic  corporation  for 
services  rendered  entirely  in  a  foreign  land  is  not  subject  to 
deduction  and  withholding  of  the  normal  tax  at  source. 

Foreign  mortgages,  income  from. — See  Income  derived 
from  coupons,  checks,  etc. 

Foreign  service  pay. — See  Pay. 

Gift,  property  acquired  by. — The  value  of  property  ac- 
quired by  gift  is  not  subject  to  income  tax,  but  all  gains, 
profits,  or  income  derived  therefrom  are  subject  to  tax,  and 
if  the  property  so  acquired  is  subsequently  sold  at  a  price 
greater  than  the  appraised  value  at  the  time  the  property 
was  acquired  by  gift,  the  gain  in  value  is  held  to  be  income 
and  subject  to  tax  under  the  provisions  of  the  Federal  in- 
come-tax law. 

Gifts. — See  Voluntary  offering. 

Gratuity. — Where  the  monthly  salary  of  an  officer  or  em- 
ployee is  paid  for  a  limited  period  after  his  death  to  his 
widow  in  recognition  of  the  services  rendered  by  her  hus- 
band, no  services  being  rendered  by  the  widow,  it  is  held 
that  such  payment  is  a  gratuity  and  exempt  from  taxation 
under  the  income-tax  law.  Such  a  payment  would  not,  how- 
ever, be  an  allowable  deduction  as  an  expense  of  carrying  on 
business  in  the  return  of  the  person,  firm,  or  corporation  pay- 
ing same. 

Guardian,  return  of. — See  Fiduciary,  return  of. 

Heat  and  light. — Amounts  received  by  or  paid  for  an  of- 
ficer for  heat  and  light  shall  be  returned  as  income. 

This  includes  the  money  equivalent,  as  fixed  by  the  Gov- 
ernment, of  heat  and  light  furnished  to  an  officer  occupying 
public  quarters.     (T.  D.  2079.) 

Heat  and  light,  corn-mutation  of. — See  Commutation  of 
heat  and  light. 


Treasury  Department  Special  Rulings         241 

Husband  and  wife. — Where  either  dies  during  the  year 
having  a  net  taxable  income  of  $3,000  or  more  a  return  of 
income  should  be  made  by  the  executor  or  administrator  of 
the  deceased  as  of  the  date  of  his  death,  and  the  executor  or 
administrator  may  claim  an  exemption  of  $4,000  under  par- 
agraph C.  The  survivor,  when  making  a  return  at  the  end 
of  the  year  for  the  entire  year,  will  be  allowed  the  applicable 
exemption  for  the  single  or  married  status  existing  at  the 
close  of  the  year. 

Husband  and  wife,  additional  tax  computed  on  separate 
income  of. — The  regulations  of  the  department  requiring  the 
incomes  of  husband  and  wife  to  be  combined  and  authorizing 
the  aggregate  exemption  of  $4,000  from  such  combined  in- 
come are  applicable  for  the  purpose  of  the  normal  tax  only. 
The  additional,  or  surtax,  imposed  by  the  act  will  be  com- 
puted on  the  basis  of  the  separate  income  of  each  individual ; 
that  is,  on  the  amount  of  each  individual's  income  in  excess 
of  the  minimum  amounts  upon  which  the  surtax  at  the  grad- 
uated rates  is  to  be  calculated. 

Income  derived  from  coupons,  checks,  or  bills  of  exchange 
on  foreign  bonds,  mortgages,  dividends,  etc. — Amounts  re- 
ceived by  citizens  or  residents  of  the  United  States  for  or  in 
payment  of  interest  upon  bonds  issued  in  foreign  countries, 
and  upon  foreign  mortgages  or  like  obligations,  and  for  any 
dividends  upon  stock  or  interest  upon  obligations  of  foreign 
corporations,  associations,  or  insurance  companies  engaged 
in  business  in  foreign  countries,  are  subject  to  the  income 
tax.    (Art.  54,  Regulations  No.  33.) 

The  licensed  person,  firm,  or  corporation  first  receiving 
such  foreign  item  for  collection  or  otherwise  shall  withhold 
therefrom  the  normal  tax  of  1  per  cent  and  will  be  held  re- 
sponsible therefor  unless  exemption  is  claimed. 

If  the  foreign  item  is  in  the  form  of  a  check  or  bill  of  ex- 
change, the  words  "Income  tax  withheld  by "  (giving 

name,  address,  and  date),  or  the  words,  "Income-tax  exemp- 
tion claimed  through "  (giving  name  and  address  of 

licensee),  as  the  case  may  be,  shall  be  indorsed  or  stamped 
16 


242  Federal  Income  Tax 

thereon  by  such  licensee ;  but  if  the  item  is  represented  by  a 
coupon  or  coupons  from  bonds,  the  licensee  shall  attach 
thereto  a  statement  identifying  the  same,  and  the  indorse- 
ment or  stamp  showing  the  tax  withheld  or  exemption  claimed 
shall  be  placed  on  the  statement  instead  of  the  coupon  or 
coupons. 

Such  indorsement  or  stamp  shall  be  sufficient  evidence  of 
tax  withheld  or  exemption  claimed  to  relieve  subsequent 
holders  or  purchasers  from  the  obligations  of  withholding. 
(T.  D.  2023,  Arts.  60-61,  Kegulations  33.) 

Claims  for  exemption  from  withholding  on  income  other 
than  from  interest  on  bonds  may  be  made  by  individuals  on 
Form  1007 ;  by  firms,  organizations,  or  fiduciaries  on  Form 
1063 ;  claims  for  exemption  from  withholding  on  interest 
from  bonds  may  be  made  by  individuals  on  Form  1000B ; 
by  firms  and  organizations  on  Form  1001 ;  and  by  fiduciaries 
on  Form  1015.      (T.  D.  1998.) 

Insurance  premium. — Premiums  paid  for  insurance  on 
property  which  is  not  occupied  by  the  owner  as  a  dwelling, 
but  is  rented  or  leased  to  secure  an  income,  constitute  allow- 
able deductions  in  computing  net  income. 

Premiums  paid  on  life  insurance  by  the  insured  do  not 
constitute  allowable  deductions  under  the  income-tax  law. 

Premiums  paid  on  life  insurance  taken  out  by  a  partner- 
ship upon  the  lives  of  individual  members  of  such  partnership 
constitute  allowable  deductions  in  ascertaining  the  net  earn- 
ings of  the  partnership.  However,  when  such  policies  ma- 
ture, or  upon  the  death  of  the  insured  partner,  the  amount 
received  as  life  insurance  should  be  included  in  the  gross  in- 
come of  the  partnership. 

Investment  certificates. — Investment  securities  issued  by 
a  corporation  for  a  term  of  years  are  corporate  obligations 
within  the  meaning  of  the  income-tax  law. 

Judges,  salary  of. — The  salary  of  judges  of  the  Supreme 
and  inferior  courts  of  the  United  States  appointed  sub- 
sequent to  October  3,  1913,  and  of  judges  who  have  been 
retired,  is  subject  to  the  income  tax  and  to  the  withholding 
provisions  of  the  income-tax  law. 


Treasury  Department  Special  Rulings         243 

Landlord. — A  landlord  in  receipt  of  annual  rental  from  a 
tenant  in  excess  of  $3,000  may,  at  the  time  the  amount  of 
rental  payments  aggregates  $3,000,  file  with  the  tenant  a 
claim  for  exemption  under  paragraph  C  of  the  income-tax 
law  (Form  1007,  revised).  He  may,  also,  after  December 
31  of  the  taxable  year,  file  with  the  tenant,  or  with  the  col- 
lector of  internal  revenue,  a  claim  for  deductions  under  para- 
graph B  on  Form  1008,  revised. 

For  duties  of  tenant  with  reference  to  withholding,  see 
Tenant,     (T.  D.  1965.) 

Legacy. — The  general  policy  of  the  law  and  rule  of  inter- 
pretation require  that  legacies  in  all  cases,  unless  clearly  in- 
consistent with  the  intention  of  the  testator,  should  be  held 
to  be  vested  rather  than  contingent.  Where  there  is  a  vested 
interest  the  income  from  such  interest,  whether  distributed 
or  not,  is  subject  to  the  tax ;  and  when  in  the  hands  of  fiducia- 
ries they  are  required  to  account  for  and  pay  the  tax  thereon. 

Life  insurance  policy,  premiums  paid  on. — See  Insurance 
premium. 

Living  qimrters  furnished. — See  Compensation,  value  of 
quarters  furnished  part  of. 

Local  benefits,  taxes  assessed  against. — Taxes  paid  pur- 
suant to  assessments  levied  by  special  districts,  such  as  irri- 
gation, reclamation,  drainage  districts,  etc.,  for  sidewalks  in 
cities,  street  extension,  grading,  paving,  etc.,  are  held  to  be 
"taxes  assessed  against  local  benefits."  Such  taxes  are  not 
allowable  deductions  in  a  return  of  annual  net  income. 

Losses  in  trade. — "Only  those  losses  are  deductible  which 
are  sustained  during  the  tax  year  'in  trade.'  Loss  to  be  de- 
ductible must  be  an  absolute  loss,  not  a  speculative  or  fluctu- 
ating valuation  of  continuing  investment,  but  must  be  an 
actual  loss,  actually  sustained  and  ascertained,  during  the  tax 
year  for  which  the  deduction  is  sought  to  be  made ;  it  must  be 
incurred  in  trade  and  be  determined  and  ascertained  upon 
an  actual,  a  completed,  a  closed  transaction." 

The  term  "in  trade,"  as  used  in  the  law  and  in  T.  D. 
2005,  is  held  to  mean  the  trade  or  trades  in  which  the  per- 


244  Federal  Income  Tax 

son  making  the  return  is  engaged ;  that  is,  in  which  he  has 
invested  money  otherwise  than  for  the  purpose  of  being  em- 
ployed in  isolated  transactions  and  to  which  he  devotes  at 
least  a  part  of  his  time  and  attention.  A  person  may  engage 
in  more  than  one  trade  and  may  deduct  losses  incurred  in 
all  of  them,  provided  that  in  each  trade  the  above  require- 
ments are  met.  As  to  losses  on  stocks,  grain,  cotton,  etc.,  if 
these  are  incurred  by  a  person  engaged  in  trade  to  which  the 
buying  or  selling  of  stocks,  etc.,  are  incident  as  a  part  of  the 
business,  as  by  a  member  of  a  stock,  grain,  or  cotton  ex- 
change, such  losses  may  be  deducted.  A  person  can  be  en- 
gaged in  more  than  one  business,  but  it  must  be  clearly 
shown  in  such  cases  that  he  is  actually  a  dealer,  or  trader,  or 
manufacturer,  or  whatever  the  occupation  may  be,  and  is 
actually  engaged  in  one  or  more  lines  of  recognized  businesses 
before  losses  can  be  claimed  with  respect  to  either  or  more 
than  one  line  of  business,  and  his  status  as  such  dealer  must 
be  clearly  established.     (T.  D.  2005.) 

Mileage. — The  difference  between  the  amount  received  as 
mileage  and  the  amount  of  actual  necessary  expenses  incurred 
on  a  journey  shall  be  returned  as  income.  Payments  on  ac- 
count of  mileage  are  not  subject  to  withholding.  (T.  D. 
2079.) 

Minor  child,  return  o/.— See  Guardian,  natural. 

Mortgage,  property  purchased  subject  to. — An  individual 
issues  coupon  bonds  secured  by  a  mortgage  upon  real  estate. 
Subsequently  a  corporation  purchases  the  real  estate  and  as- 
sumes (as  between  the  mortgagor  and  itself)  the  payment  of 
bonds  and  coupons.  Held,  that  the  situation  is  not  changed 
by  the  purchase  by  the  corporation.  The  corporation  pur- 
chased only  the  mortgagor's  equity  of  redemption  (and  the 
mortgagor's  possession)  ;  the  property  is  the  security,  and  the 
character  of  the  bond  obligation  remains  unchanged  and  as 
created,  even  though  the  corporation  is  to  pay  all  interest  and 
will  ultimately  pay  off  the  mortgage.  There  will  be  no  with- 
holding by  the  corporation  (it  being  placed  in  the  stead  of 
the  mortgagor)  until  the  interest  payment  to  any  one  person 
in  any  year  exceeds  $3,000.     (See  public  utility.) 


Treasury  Department  Special  Rulings         245 

Municipality,  obligation  of. — See  Public  utility,  and 
Mortgage,  property  purchased  subject  to. 

Naval  Officers.-. — See  Oaths. 

Nonresident  alien,  agent  of. — The  responsible  heads, 
agents,  or  representatives  of  nonresident  aliens  who  are  in 
charge  of  the  property  owned  or  business  carried  on  within 
the  United  States  by  nonresident  aliens  shall  make  full  and 
complete  returns  of  the  income  therefrom  on  Form  1040,  re- 
vised, and  shall  pay  any  and  all  tax,  normal  and  additional, 
assessed  upon  the  said  income  of  such  nonresident  aliens. 
(T.  D.  2013.) 

Notary  public. — See  Oaths. 

Oaths. — (1)  A  return  of  income  rendered  by  an  individual 
residing  abroad  may  be  acknowledged  before  any  duly  ap- 
pointed officer  of  the  country  in  which  he  resides  authorized 
to  administer  oaths  and  use  an  official  seal. 

(2)  If  a  return  is  executed  in  a  State  before  a  notary 
who  is  not  required  by  the  laws  of  the  State  to  use  a  seal, 
and  none  is  used,  the  notary  should  file  with  the  Commis- 
sioner of  Internal  Revenue  the  certificate  of  an  officer  pos- 
sessing a  seal,  showing  that  he  is  duly  commissioned  and 
authorized  to  administer  oaths ;  otherwise  the  certificate  will 
not  be  recognized. 

(3)  Returns  acknowledged  before  commanding  officers  of 
naval  vessels  while  at  sea  or  in  foreign  ports  will  be  ac- 
cepted. 

(4)  Returns  executed  before  a  summary  court  officer, 
United  States  Army,  will  not  be  accepted. 

Ownership  certificates. — Ownership  certificates  should  be 
filed  with  coupons  of  exempt  organizations  when  presented 
for  collection.     (See  Exempt  organizations.) 

Partnership — Identity  of  income. — The  character  of  part- 
nership profits  divisible  between  persons  has  no  reference  to 
any  character  which,  as  income  accruing  to  the  partnership,  it 
may  have  borne  prior  to  receipt  by  the  partnership.  It  is 
therefore  held  that  income  received  from  a  partnership  can 
not  be  traced  to  its  source  behind  the  partnership  for  the 
purpose  of  claiming  individual  exemption. 


246  Federal  Income  Tax 

Income,  when  accrued. — It  is  held  that  the  income  from  a 
partnership  accrues  to  the  individual  partner  at  the  time  his 
distributive  interest  is  determined  and  reducible  to  possession. 
In  the  returns  of  income  made  by  individuals  for  the  calen- 
dar year,  therefore,  there  should  be  included  such  income 
accruing  from  the  business  of  partnerships  for  their  business 
years  as  may  have  been  definitely  ascertained  by  means  of  a 
book  balance,  whether  distributed  or  not.  In  other  words, 
members  of  partnerships  are  required  to  make  returns  of  in- 
come like  other  individauls  for  the  calendar  year,  and  should 
include  in  their  returns  the  net  proceeds  of  their  interest  in 
partnership  profits  ascertained  at  the  end  of  the  business  year 
falling  within  the  calendar  year  for  which  the  individual 
return  is  being  rendered. 

Pay. — Congress  has  clearly  specified  the  conditions  under 
which  officers  and  enlisted  men  are  entitled  to  foreign  service 
pay,  aids'  pay,  and  pay  for  certificate  of  merit,  and  such 
items  of  income  are  considered  as  fixed  and  determinable  and 
subject  to  the  withholding  provisions  of  the  income-tax  law. 

Penalty  for  failure  to  render  a,  return. — See  Failure  to 
render  a  return,  penalty  for. 

Pension,  foreign. — License  not  required  for  collection  of 
foreign  pensions  paid  to  resident  aliens  or  citizens  of  the 
United  States. 

Pensions. — Pensions  paid  by  the  United  States  Govern- 
ment are  subject  to  the  income  tax. 

Per  diem  allowances  in  lieu  of  subsistence  while  traveling 
under  orders. — The  difference  between  the  amount  received 
as  a  per  diem  allowance  and  the  amount  of  actual  necessary 
expenses  incurred  on  a  journey  shall  be  returned  as  income 
and  is  not  subject  to  withholding.     (T.  D.  2079.) 

Power  of  attorney,  fiduciary  relation  can  not  be  created  by. 
— A  person  can  not,  by  a  power  of  attorney,  delegate  to  an- 
other a  duty  which  he  himself  could  not  perform,  and  in- 
asmuch as  an  individual  can  not  relieve  a  withholding  agent 
from  the  withholding  requirements  of  the  income-tax  law  by 
filing  Form  1015,  a  person  holding  a  power  of  attorney  from 
another  is  without  authority  to  file  this  certificate  as  a  fidu- 


Treasury  Depaktment  Special  Kulings         247 

ciary.  However,  for  income-tax  jmrposes  he  is  authorized 
to  rile  any  certificate  which  bis  principal,  as  such,  would  be 
entitled  to  file. 

Premium  on  bond. — See  Bond,  premium  on. 

Principal  place  of  business  of  corporations. — See  Corpor- 
ations, principal  place  of  business  of. 

Profit  from  sale  of  real  estate. — Profit  is  the  difference 
between  tbe  selling  price  and  the  cost  where  the  selling- 
price  is  more  than  the  cost. 

"Cost  of  property  purchased  prior  to  the  incidence  of  the 
special  excise  tax  (Jan.  1,  1909),  or  tbe  incidence  of  the  in- 
come tax  (Mar.  1,  1913),  will  be  the  actual  price  paid  for 
the  property,  including  the  expense  incident  to  the  procure- 
ment of  the  property  in  the  first  instance  and  its  sale  there- 
after, togetber  with  carrying  cbarges  of  interest  actually 
paid,  insurance,  and  taxes  actually  paid  prior  to  tbe  incidence 
(special  assessments,  if  any,  'actually  paid'  as  'local  bene- 
fits' in  connection  with  real  estate)  ;  provided  that  where,  up 
to  the  incidence  of  the  tax,  the  expense  of  carrying  property 
has  exceeded  the  income  from  it,  the  difference  between  tbe 
expense  of  carrying  and  tbe  income  from  the  property  shall 
be  added  to  the  purchase  price,  and  the  sum  thus  ascertained 
shall  be  the  cost  of  the  property ;  and  provided  further,  that 
in  the  case  of  property  purchased  prior  to  the  incidence  of  the 
tax  and  sale  thereof  subsequent  to  the  incidence  of  the  tax, 
there  shall  be  excluded  from  consideration  in  ascertaining 
cost  of  any  items  of  income,  expense,  interest,  and  taxes  pre- 
viously taken  into  account  in  preparing  a  return  of  annual 
net  income. 

"The  cost  of  property  acquired  subsequent  to  the  incidence 
of  the  tax  will  be  tbe  actual  price  paid  for  it,  together  with 
the  expense  incident  to  the  procurement  of  the  property  in 
the  first  instance,  and  its  sale  thereafter,  and  the  cost  of  im- 
provement or  betterment,  if  any." 

The  entire  profits  realized  by  individuals  or  corporations 
from  the  sale  of  real  estate  will  be  taxable  except  where  the 
property  in  connection  with  which  the  profit  is  obtained  was 
acquired  prior  to  March  1,  1913,  in  the  case  of  individuals, 


248  Federal  Income  Tax 

or  prior  to  January  1,  190!>,  in  the  case  of  corporations ;  and 
then  and  in  such  event  the  profit  will  be  prorated  over  the 
whole  time  the  property  was  held,  and  that  part  of  the  whole 
profit  apportioned  to  the  taxable  period  will  be  reported  in 
annual  returns  of  income.  In  prorating,  fractional  parts  of 
years  will  not  be  considered. 

For  income-tax  purposes,  where  there  is  an  actual  sale  and 
transfer,  profit  will  be  considered  as  realized  even  though 
payment  is  to  be  made  in  installments,  as  notes  for  deferred 
payments  are  secured  by  the  title  to  the  property  and  pre- 
sumably bear  interest  and  are  held  to  be  worth,  in  cash,  their 
face  value. 

In  case  of  default  on  installment  payments  there  may  be 
charged  off  as  bad  debts  the  amount  of  such  unpaid  install- 
ments less  the  salvage  value  of  the  real  estate  repossessed. 
(T.  D.  2005.) 

Profit  sharing. — See  Compensation. 

Promissory  note  of  corporations. — A  simple  promissory 
note  not  exceeding  one  year  in  time  is  not  "similar  to  bonds, 
mortgages,  or  deeds  of  trust  of  corporations,"  and  the  interest 
on  such  a  note  is  not  subject  to  withholding  except  when  the 
amount  of  interest  thereon  payable  to  an  individual  in  any 
one  year  is  in  excess  of  $3,000,  or  when  the  interest  thereon 
is  payable  to  a  nonresident  alien,  in  which  latter  case  the 
tax  should  be  withheld  regardless  of  the  amount  of  interest 
payment. 

Public  utility. — Where  a  municipality  purchases  a  public 
utility  subject  to  a  mortgage,  the  mortgage  retains  its  orig- 
inal character,  even  though  the  municipality  assumes  the 
mortgage  indebtedness  and  pays  the  interest  thereon.  There- 
fore, the  indebtedness  secured  by  such  mortgage  is  not  an 
obligation  of  the  municipality  within  the  meaning  of  para- 
graph B  of  the  income-tax  law.  (See  Mortgage,  property 
purchased  subject  to.) 

Quarters. — Commutation  of  quarters  and  the  money 
equivalent  of  quarters  furnished  in  kind  shall  be  returned 
as  income. 


Treasury  Department  Special  Rulings         249 

When  quarters  are  furnished  in  kind  of  a  less  number  of 
rooms  than  the  number  allowed  by  law,  the  money  equivalent 
only  of  the  number  of  rooms  actually  assigned  shall  be  re- 
turned as  income.  When  quarters  are  furnished  in  kind  of 
a  greater  number  of  rooms  than  the  number  allowed  by  law, 
it  is  to  be  assumed  that  the  excess  number  is  assigned  for 
the  convenience  of  the  Government,  and  the  money  equiv- 
alent only  of  the  number  of  rooms  allowed  by  law  shall  be 
returned  as  income.      (T.  D.  2079.) 

Quarters,  commutation  of. — See  Commutation  of  quarters. 

Real  estate  agents. — Eeal  estate  agents  are  not  required  to 
deduct  and  withhold  the  normal  tax  from  rents  collected, 
even  though  the  amount  is  in  excess  of  $3,000.  The  agent 
stands  in  the  place  of  the  landlord  and  receives  money  from 
tenants  in  exactly  the  same  capacity  as  the  landlord  would 
receive  such  moneys  and  should  be  treated  as  such.  A  real 
estate  agent  does  not  act  as  an  agent  of  the  debtor.  Therefore 
the  duty  of  withholding  the  tax  can  not  be  transferred  from 
the  debtor  to  such  agent,  localise  such  transfer  woidd  simply 
be  transferring  the  duty  of  withholding  to  the  landlord  him- 
self. 

Eeal  estate,  profit  from  sale  of. — See  Profit  from  sale  of 
real  estate. 

Reimbursement  for  actual  expenses. — Amounts  paid  by 
the  Government  in  the  nature  of  reimbursement  for  subsist- 
ence and  other  items  of  actual  expense  incurred  while  absent 
on  business  for  the  Government  are  not  required  to  be  re- 
turned as  income.      (T.  D.  2079.) 

Renewal  premium. — Commissions  on  renewal  premiums 
for  insurance  are  income  when  received  and  income  for  the 
period  in  which  received. 

Rent. — Where  a  tenant  rents  two  pieces  of  property  from 
the  same  owner,  the  tenant  should  combine  the  payments, 
and  when  such  payments  so  combined  aggregate  in  excess  of 
$3,000  the  normal  tax  should  be  deducted  and  withheld,  sub- 
ject to  authorized  exemptions  claimed. 

Where  a  board  of  education  for  a  school  district  rents  prop- 
erty at  an  annual  rental  exceeding  $3,000,  such  board  of  ed- 


250  Federal  Income  Tax 

ucation  is  regarded  as  a  tenant  and  should  withhold  the  nor- 
mal tax,  subject,  however,  to  the  exemption  claimed. 

A  lessee  paying  rent  in  excess  of  $3,000  a  year  under  a 
lease  from  two  or  more  individuals  must  mate  deduction 
from  all  payments  to  individuals  in  excess  of  $3,000  unless 
certificates  of  exemption  are  filed.  He  should  ascertain  in 
what  proportion  the  rent  is  divided  by  the  use  of  office  Form 
1000B,  which  may  be  adapted  and  executed  by  one  of  the 
parties  in  interest,  the  others  executing  Form  1007.  The 
withholding  should  be  made  from  the  income  of  individuals 
and  not  from  the  aggrgate  amount  paid.  This  situation  is 
not  different  if  the  lessors  are  husband  and  wife  if  their  in- 
dividual interests  are  separate.  The  situation  is  not  changed 
if,  by  instruction,  the  actual  payments  of  rent  are  made  to  one 
lessor,  the  payments  to  be  distributed  by  him.  Where  notes 
are  given  in  payment  of  rent,  the  lessee's  obligation  to  with- 
hold is  not  altered.  The  lessee's  obligation  is  the  same  as  in 
the  case  of  cash  rental,  withholding  occurring  at  the  time  the 
notes  are  given,  and  not  at  maturity.  When  rental  payments 
in  excess  of  $3,000  a  year  are  payable  to  a  fiduciary,  who 
fails  or  refuses  to  file  Form  1063,  agreeing  to  act  as  the 
source,  the  beneficiaries  are  not  entitled  to  file  exemption  cer- 
tificates directly,  the  lease  having  been  taken  from  the  fidu- 
ciary. If  the  fiduciary's  certificate  is  not  filed,  the  lessee 
should  withhold  1  per  cent  on  the  entire  amount.  The  lessee 
is  not  presumed  to  have  knowledge  of  the  beneficiaries  un- 
less they  are  parties  to  the  lease. 

Bent. — See  Living  quarters. 

Return  of  fiduciary  or  guardian. — See  Fiduciary,  return 
of. 

Returns,  execution  of. — See  Oaths. 

Salaries,  withholding  on,  based  on  calendar  year. — The 
salary  of  an  individual  is  subject  to  withholding  at  the  source 
only  on  the  basis  of  the  calendar  year.  Corporations  which 
have  a  fiscal  year  other  than  the  calendar  year  and  pay  em- 
ployees salaries  of  $3,000  or  over  per  annum  will  be  required 
to  withhold  on  the  basis  of  the  calendar  year. 


Treasury  Department  Special  Eulings         251 

Salary  of  judges. — See  Judges,  salary  of. 

Salary  paid  in  advance. — See  Compensation. 

Salary  paid  to  widow  for  a  limited  time  after  death  of 
employee. — See  Gratuity. 

Scrip. — Scrip  certificates  issued  by  a  corporation  to  its 
stockholders  in  lieu  of  dividends,  such  scrip  certificates  bear- 
ing interest  payable  semiannually  and  redeemable  at  a  speci- 
fied time  not  longer  than  one  year  from  date  of  issue,  are 
not  corporate  obligations  similar  to  bonds,  mortgages,  or  deeds 
of  trust,  and  the  interest  payable  thereon  will  not  be  subject 
to  withholding  except  when  the  amount  thereof  payable  to  an 
individual  in  a  calendar  year  exceeds  $3,000.  Payment  in 
scrip  is  held  to  be  equivalent  to  payment  in  cash,  and  when 
the  amount  of  such  scrip  payment  to  any  one  individual  in  a 
calendar  year  is  in  excess  of  $3,000  the  tax  must  be  with- 
held and  accounted  for  in  excess  of  exemption  claimed. 

Special  assessment  districts. — Special  assessment  districts 
created  under  the  laws  of  the  several  States  for  public  pur- 
poses, such  as  the  improvement  of  streets  and  public  high- 
ways, the  provision  for  sewerage,  gas,  and  light,  and  the 
reclamation,  drainage,  or  irrigation  of  bodies  of  land,  and 
levee  and  school  districts,  are  held  to  be  political  subdivisions 
of  a  State,  and  income  derived  from  interest  upon  the  obli- 
gations of  such  districts  shall  not  be  included  in  computing 
net  income.    (T.  D.  1946.) 

Taxes  paid  pursuant  to  assessments  levied  by  such  special 
assessment  districts  are  held  to  be  "taxes  against  local  bene- 
fits," and  are,  therefore,  not  allowable  deductions  in  comput- 
ing net  income. 

Stock  dividends. — Stock  dividends  when  required  to  be 
included  in  a  return  of  income  should  be  accounted  for  at  the 
valuation  jilaced  upon  the  stock  by  the  corporation  when  said 
stock  dividends  were  issued. 

Summary  court  officers. — See  Oaths. 

Taxes. — Taxes  paid  by  citizens  or  resident  aliens  of  the 
United  States  to  a  foreign  country  are  not  allowable  deduc- 
tions in  computing  net  income.     The  provision  of  law  for 


252  Federal  Income  Tax 

the  deduction  of  taxes  applies  only  to  taxes  paid  to  the  United 
States,  or  to  some  State  or  political  subdivision  thereof  in  the 
United  States. 

Taxes,  special. — See  Special  assessment  districts. 

Tax-free  covenant  clause. — See  Bonds  containing  tax-free 
covenant  clause. 

Tenant. — See  Rent. 

Theatrical  profession. — See  Actors  and  actresses. 

Voluntary  offering. — Easter  offerings,  and  fees  received  by 
clergymen  for  funerals,  masses,  marriages,  baptisms,  etc.,  are 
considered  income  subject  to  tax  under  the  provisions  of  the 
income-tax  law  of  October  3,  1913.  Christmas  gifts,  how- 
ever, are  not  considered  income  within  the  meaning  of  the 
law  and  should  not  be  included  in  a  return. 

Withholding  from,  rents. — See  Rent. 

Worthless  debt. — See  Debt. 

Part  II. 

RULINGS    IN    RELATION    TO    CORPORATION    INCOME    TAX. 

Agricultural  and  Horticultural  Associations. 

Agricultural  and  horticultural  associations  specifically 
enumerated  as  exempt  are  held  to  be  such  associations  as 
county  fairs,  or  like  organizations,  not  themselves  engaged  in 
agricultural  or  horticultural  pursuits,  but  which,  by  means 
of  awards,  premiums,  etc.,  are  intended  to  encourage  better 
production  and  no  part  of  whose  income  inures  to  the  benefit 
of  any  private  stockholder  or  individual. 

Corporations  engaged  in  agricultural  or  horticultural  pur- 
suits for  profit  are  liable  under  the  law  to  make  returns  and 
to  pay  the  income  tax  thereby  shown  to  be  due. 

Agricultural  organizations. — Corporations  owning  sugar 
or  other  plantations  and  disposing  of  the  products  thereof 
are  held  to  be  operating  for  profit  and  are  not  entitled  to 
exemption  as  agricultural  organizations. 

Bank  guaranty  fund. — The  reserve  required  to  be  set  aside 
by  banks  in  various  States  and  kept  and  maintained  in  said 


Treasury  Department  Special  Eulings         253 

banks  as  a  guaranty  of  depositors  in  the  banks  of  said  States 
— which  said  guaranty  fund  is  subject  to  draft  by  said  bank- 
ing commissions  or  boards,  in  amounts  to  be  determined  by 
said  State  banking  commissions  or  boards,  only  for  the  pur- 
pose of  supplying  deficiencies  in  estates  of  failed  or  insol- 
vent banks — is  not  an  expenditure  and  can  not  be  considered 
either  as  a  tax  or  an  expense.  It  is  a  reserve  required  to  be 
kept  and  maintained  for  a  certain  and  specifically  designated 
purpose.  The  amoimts  actually  expended  from  such  fund  in 
paying  therefrom  drafts  of  the  State  banking  commissions  or 
boards  on  said  fund  are  in  the  nature  of  insurance  cost,  and 
as  such  may  be  deducted  as  a  business  expense.  The  reserve, 
per  se,  is  not  deductible  in  a  return  of  income.  (See  page 
296.) 

Capital  of  a  corporation. — The  amount  received  by  a  cor- 
poration for  the  original  issue  and  sale  of  its  capital  stock  is 
held  to  be  the  capital  of  the  corporation.  In  cases  where  the 
stock,  as  originally  issued,  is  sold  at  a  price  greater  or  less 
than  the  par  value,  neither  the  premium  nor  the  discount  will 
be  taken  into  account  in  determining  the  net  income  of  the 
corporation  for  the  year  in  which  the  stock  is  sold.  This  is 
purely  a  capital  transaction  and  the  income  is  neither  in- 
creased nor  decreased  by  reason  of  the  sale,  per  se,  of  the 
stock  at  a  price  greater  or  less  than  its  par  value. 

Collateral  the  subject  of  sale  in  ordinary  course  of  business 
of  a  corporation  {expense  of  business). — As  used  in  the  act, 
the  expression  "collateral  the  subject  of  sale,"  etc.,  refers  to 
physical  or  tangible  property  bound  for  the  performance  of 
certain  covenants  or  payment  of  certain  obligations,  and 
which  physical  or  tangible  property  is  the  "subject  of  sale  in 
the  ordinary  business  of  a  corporation"  owning  the  same. 
Where  such  corporation  is,  as  a  matter  of  its  ordinary  busi- 
ness, engaged  in  buying  and  selling,  or  dealing  in  such  prop- 
erty, the  interest  actually  paid  within  the  year  on  indebted- 
ness wholly  secured  by  such  collateral  may  be  allowably  de- 
ducted from  gross  income  as  an  expense  of  doing  business, 
without  regard  to  the  limit  of  deductible  interest  as  otherwise 
provided  by  the  statute.     The  corporation,  etc.,  must  be  or- 


254  Federal  Income  Tax 

ganized  and  operated  for  the  purpose  of  buying,  selling, 
and  dealing  in  the  particular  kind  of  property  which  becomes 
the  collateral  in  question,  and  the  particular  property  pledged 
for  the  debt  upon  which  the  interest  is  paid  must  be  the  "sub- 
ject of  sale  in  the  ordinary  business  of  the  corporation."  Real 
estate  mortgaged,  and  the  property  of  corporations  organized 
for  and  engaged  in  the  business  of  buying,  selling,  and  deal- 
ing in  real  estate,  warehouse  receipts  representing  property 
the  subject  of  sale  in  the  ordinary  business  of  the  corporation 
owning  the  same,  and  which  warehouse  receipts  are  pledged 
as  collateral  for  such  corporation's  own  debt,  are  examples 
where  the  interest  paid  wall  be  deductible  as  a  "business  ex- 
pense" and  not  be  subject  to  the  statutory  limitation  as  to 
interest  deduction.     (See  T.  D.  1993.) 

Corporation — Exempt. — Cooperative  dairies  are  not.  (T. 
D.  1996.) 

Corporations  in  existence  hid  part  of  year. — All  corpora- 
tions having  an  existence  as  such  during  all  or  any  portion  of 
a  year,  unless  coming  within  the  classes  specifically  enumer- 
ated as  exempt,  are  required  to  make  returns.  Dissolved  cor- 
porations whose  fiscal  year  coincides  with  the  calendar  year 
will  make  returns  covering  the  period  from  January  1  to  the 
date  of  dissolution,  and  corporations  having  a  fiscal  year 
other  than  the  calendar  year  will  make  returns  covering  the 
period  from  the  beginning  of  the  fiscal  year  to  the  date  of 
dissolution ;  and  new  corporations  will  make  return  for  the 
period  from  the  date  of  their  organization  to  December  31. 
The  net  income  in  all  such  cases  will  be  ascertained  in  the 
manner  set  forth  in  paragraph  G  of  the  act. 

Donations. — Donations  by  corporations  which  legitimately 
represent  a  consideration  for  a  benefit  flowing  directly  or 
indirectly  to  the  corporation  as  an  incident  of  its  business  are 
allowable  deductions  from  gross  income  in  ascertaining  net 
income  subject  to  the  income  tax,  as  donations  to  a  hospital 
upon  consideration  that  employees  of  the  corporation  are  to 
have  a  ward  for  their  use  in  case  of  accident  or  illness.  The 
absence  of  consideration  moving  in  some  form  to  the  corpora- 


Treasury  Department  Special  Rulings         255 

tion  will  make  a  contribution  a  mere  gratuity.  Gratuities 
are  not  allowable  deductions  in  a  return  of  income  by  cor- 
porations. 

Donations  made  for  purposes  connected  with  the  operation 
of  the  property,  when  limited  to  charitable  institutions,  hos- 
pitals, or  educational  institutions  conducted  for  the  benefit 
of  the  employees  of  a  corporation  or  their  dependents,  shall 
be  proper  as  a  deduction  under  the  head  of  expense  in  the  re- 
turn of  the  corporation. 

Earnings  or  dividends  not  deductible. — Every  corporation, 
no  matter  how  closely  related  it  may  be  to  any  other  corpora- 
tion, is  required  to  make  return  of  annual  net  income  and  to 
pay  any  income  tax  thereby  shown  to  be  due. 

Parent,  holding,  or  other  corporations  must  include  in  their 
gross  income,  and  can  not  deduct  therefrom,  any  dividends  or 
share  of  earnings  which  they  may  receive  from  a  subsidiary, 
related,  or  any  other  corporation.  The  fact  that  the  parent 
or  holding  company  owns  all  the  stock  of  the  subsidiary  com- 
pany is  immaterial  and  will  not  warrant  such  parent  com- 
pany in  omitting  or  deducting  dividends  from  gross  income. 

The  Federal  income-tax  law  fixes  a  specific  rule  by  which 
the  net  income,  for  the  purposes  of  the  tax,  is  to  be  confuted. 
That  rule  makes  no  provision  for  the  exclusion  or  deduction 
from  the  taxable  income  of  dividends  received. 

Expense  {spending  or  treating  money). — So-called  spend- 
ing or  treating  money  actually  advanced  by  corporations  to 
their  traveling  salesmen  as  a  part  of  selling  expense  of  the 
product  of  such  corporation  is  an  allowable  deduction  in  a 
return  of  income  by  such  corporation.  There  must  be  some 
showing  that  all  the  allowance  claimed  as  a  deduction  was 
actually  expended  for  the  purpose  for  which  the  allowance 
was  made,  namely,  the  selling  of  the  product  of  the  corpor- 
ation in  question. 

Fiscal  year  {corporation) — The  financial  year  of  a  corpor- 
ation, etc.,  at  the  end  of  which  the  accounts  are  balanced. — 
For  income-tax  purposes,  in  the  absence  of  designation  other- 
wise, all  returns  are  required  to  be  made  on  the  basis  of  the 
calendar  year.     The  privilege  of  making  a  return  of  income 


256  Federal  Income  Tax 

ou  the  basis  of  a  fiscal  year  other  than  the  calendar  year  is 
limited  to  corporations  or  institutions  which  make  returns 
and  pay  tax  as  corporations.  The  statute  provides  that  re- 
turns must  be  made  on  the  basis  of  a  calendar  year  unless  the 
corporation,  etc.,  involved  shall  designate  a  fiscal  year  other 
than  the  calendar  year  in  the  manner  provided  by  the  statute. 
When  the  calendar  year  shall  have  passed,  a  return  of  income 
for  the  entire  period  of  such  calendar  year  is  then  due  and 
must  be  made  out  and  filed  with  the  proper  collector  of  inter- 
nal revenue  on  or  before  March  1  then  next  following.  This 
is  true  even  of  corporations  and  institutions  making  return 
as  corporations,  except  that  such  corporations,  etc.,  are  given 
the  privilege  of  filing  with  the  collector  of  internal  revenue 
(with  whom  their  return  must  be  filed)  not  less  than  30  days 
(more,  but  not  less)  prior  to  March  1  (the  date  when  the  re- 
turn on  the  basis  of  a  calendar  year  is  to  be  filed),  a  notice, 
in  writing,  setting  forth  that  such  corporation,  etc.,  has  desig- 
nated the  last  day  of  some  month  in  the  year  (other  than  the 
last  day  of  December)  as  the  day  of  the  closing  of  its  fiscal 
year,  and  that  from  the  date  so  designated  as  the  close  of  its 
fiscal  year  its  books  have  been  or  will  be  kept  on  the  basis 
of  such  designated  fiscal  year.  When  this  said  notice  is  filed 
with  the  collector  of  internal  revenue,  a  return  must  then  be 
made  on  or  before  March  1  for  such  part  of  the  calendar  year 
elapsed  as  is  not  included  in  the  said  designated  fiscal  year, 
and  return  for  the  full  designated  fiscal  year  must  be  made 
and  filed  within  60  days  next  succeeding  the  last  day  of  said 
designated  fiscal  year.  This  rule  will  apply  whether  the 
designation  affects  the  fiiture  or  past,  provided  always  that 
the  return  of  income  can  not  cover  more  than  12  consecutive 
months. 
Example : 

1914 
A  X  B  C  Y  Z 


Jan.   1       June  30       Dec.  31        Mar.  1        June  30      Aug.  29 

AB  is  calendar  year  and  C  is  March  1,  the  time  when  re- 
turn on  the  basis  of  the  calendar  year  must  be  filed.    At  any 


Treasury  Department  Special  Kulings         257 

time  not  less  than  30  days  prior  to  C  a  corporation  may  file 
with  the  collector  with  whom  its  return  of  income  must  be 
filed  a  notice  in  writing  setting  forth  that  said  corporation, 
etc.,  has  designated  the  last  day  of  some  month  in  the  year 
(other  than  December  31)  as  the  day  of  the  close  of  its  fiscal 
year,  as  June  30,  represented  by  X;  thereafter,  on  March  1, 
a  return  will  be  filed  for  the  period  AX.  XY  represents  the 
first  designated  fiscal  year,  and  for  this  said  fiscal  year  a  re- 
turn of  income  must  be  made  (covering  the  period  XY)  sub- 
sequent to  June  30  and  on  or  before  August  29 ;  in  other 
words,  the  60-day  period  next  following  the  close  of  the  fiscal 
year.  Thereafter  returns  of  income  will  be  made  and  filed 
annually  subsequent  to  June  30,  and  on  or  before  August  29. 
(See  T.  D.  2001  and  2029.) 

Gifts  to  corporation — Income. — The  value  or  amount  of  a 
gift  to  a  corporation  is  held  to  be  income  to  such  corporation 
and  should  be  returned  as  such  for  the  year  in  which  the 
gift  is  received.  The  provision  of  the  act  of  October  3,  1913, 
which  exempts  gifts,  bequests,  etc.,  from  the  tax  imposed  by 
the  act  applies  to  individuals  and  not  to  corporations. 

Horticultural  societies. — Fruit-growers'  associations  whose 
purpose  is  to  promote  the  mutual  benefit  of  their  members  in 
marketing  their  products  and  which  are  not  organized  for 
profit  and  have  no  capital  stock  represented  by  shares,  and 
whose  income  is  derived  wholly  from  membership  fees,  dues, 
and  assessments  to  meet  necessary  expenses,  are  horticultural 
societies  within  the  meaning  of  the  law  and  are  not  subject  to 
tax  or  required  to  make  returns. 

Interest. — Individuals  are  permitted  a  deduction  of  "all 
interest  paid  within  the  year  *  *  *  on  indebtedness" ; 
corporations  are  permitted  a  deduction  of  interest  paid  with- 
in the  year  on  an  amount  measured  by  "the  amount  of  cap- 
ital stock,  or  capital  employed,  plus  one-half  the  interest- 
bearing  debt,"  both  outstanding  at  the  close  of  the  year. 

A  foreign  corporation  in  determining  the  maximum  prin- 
cipal upon  which  interest  for  the  purpose  of  a  deduction  may 
be  computed  will  add  to  the  amount  of  its  paid-up  capital 
stock,  or  if  no  capital  stock,  then  the  amount  of  capital  em- 
17 


258  Fedekal  Income  Tax 

ployed  in  business,  one-half  the  interest-bearing  indebtedness, 
both  outstanding  at  the  close  of  the  year.  Such  proportion  of 
this  sum  as  the  gross  income  derived  from  business  transacted 
in  this  country  bears  to  the  gross  income  received  from  bus- 
iness done  or  capital  invested,  both  within  and  without  the 
United  States,  will  constitute  the  maximum  principal  upon 
which  interest  for  the  purpose  of  a  deduction  from  the  income 
in  the  United  States  may  be  computed.  For  instance,  if  the 
gross  income  in  the  United  States  is  one-fourth  of  the  entire 
gross  income,  then  one-fourth  of  the  sum  of  the  paid-up  capital 
stock  plus  one-half  the  interest-bearing  indebtedness  will  be 
the  maximum  principal  upon  which  interest  deductible  from 
the  United  States  income  may  be  computed. 

Life  insurance  in  favor  of  corporations. — In  cases  wherein 
corporations  pay  premiums  on  insurance  policies  insuring, 
in  favor  of  the  corporations,  the  lives  of  officers  or  others, 
such  premiums  may  be  allowably  deducted  from  the  gross 
income  of  the  corporations  paying  the  same. 

In  all  such  cases  the  proceeds  of  the  policies  when  paid  at 
maturity  or  upon  death  of  the  insured  shall  be  returned  by 
the  corporation  as  income  for  the  year  in  which  such  proceeds 
were  received. 

Paid-up  capital  stock  outstanding  at  close  of  year. — "Paid- 
up  capital  stock  outstanding  at  the  close  of  the  year,"  when 
used  in  connection  with  "interest-bearing  indebtedness,"  to 
determine  the  maximum  principal  upon  which  interest  for 
the  purpose  of  an  authorized  deduction  is  to  be  computed, 
means  the  par  value  of  shares  issued  as  reported  in  Item  1 
of  the  return  form,  and  will  not  include  the  surplus  carried 
by  the  corporation.  (See  T.  D.  1960  for  method  of  computa- 
tion and  T.  D.  1993  for  regulation  as  to  deduction  of  in- 
terest paid  on  indebtedness  wholly  secured  by  collateral, 
the  subject  of  sale,  in  the  ordinary  course  of  business.) 

Pensions  paid  employees,  etc. — Amounts  paid  for  pensions 
to  retired  employees  or  to  their  families  or  others  dependent 
upon  them,  or  on  account  of  injuries  received  by  employees, 
are  proper  deductions  as  ordinary  and  necessary  expenses. 
Gifts  or  gratuities  to  employees  in  the  service  of  a  corpora- 


Treasury  Department  Special  Rulings         259 

tion  are  not  properly  deductible  in  ascertaining  net  income 
of  the  corporation. 

Philippine  and  Porto  Rican  corporations. — Such  corpora- 
tions organized  under  laws  of  the  United  States  or  any  State 
thereof,  resident  in  the  United  States  but  doing  business  in 
these  possessions,  are  taxable  in  the  United  States.  If  they 
are  organized  under  the  laws  of  the  United  States  or  local 
laws  of  these  possessions  and  resident  in  said  possessions, 
they  are  required  to  pay  their  tax  in  the  Philippines  or  in 
Porto  Rico,  as  the  case  may  be.  The  law  provides  that  cor- 
porations shall  make  their  returns  "to  the  collector  of  inter- 
nal revenue  for  the  district  in  which  they  have  their  prin- 
cipal place  of  business."  Held,  "principal  place  of  busi- 
ness" of  a  corporation  is  the  place  or  office  in  which  are 
kept  the  books  of  account  and  other  data  from  which  the 
return  is  to  be  prepared. 

Public  utility  (business  expense). — In  case  of  a  public 
utility  constructed,  operated,  or  maintained  under  contract 
with  any  city,  Territory,  or  the  District  of  Columbia,  or  a 
city  where  a  portion  of  the  net  earnings  of  such  public  utility 
is  payable  under  such  contract  to  the  State,  Territory,  etc., 
the  amount  so  paid  may  be  deducted  by  the  public  utility 
operated  under  such  contract  as  an  "expense  of  business." 
(See  Art.  93,  Reg.  33.) 

Rent. — Payments  measured  by  a  fixed  percentage  on  the 
stock  of  a  railroad  corporation  whose  lines  are  leased  by 
another  railroad  corporation  and  which  rent  is  payable  by 
the  lessee  directly  to  the  stockholders  of  the  lessor  corpora- 
tion, have,  under  the  income-tax  law  with  respect  to  the  cor- 
poration paying  such  sums,  the  status  of  a  rental  payment. 

In  such  cases  there  are  two  corporations  involved,  the  lessor 
and  the  lessee — one  the  rent  payer  and  the  other  the  rent 
receiver.  To  the  lessee  rental  payments  are  an  expense  of 
operation;  to  the  lessor  the  rentals  are  an  income. 

A  contract  which  provides  that  the  rentals  shall  be  paid  to 
a  third  party,  not  a  party  to  the  contract,  does  not  change 
the  character  of  the  payment,  nor  relieve  the  lessor  from  lia- 
bility to  tax  on  the  rental  income  which  the  lessee  pays  to  it 


260  Federal  Income  Tax 

or  to  such  third  party.  The  income  of  the  third  party,  the 
stockholder,  is  dividends  on  the  stock  which  he  holds  in  the 
lessor  company.  Dividends  can  not  be  paid  unless  the  lessor 
has  an  income  out  of  which  to  pay  them.  Hence  the  lessor 
company  is  required  under  the  law  to  return  as  income  the 
rentals  which  the  lessee  is  required  to  pay.  In  paying  direct 
to  the  stockholders  the  lessee  is  acting  as  the  agent  of  the 
lessor,  and  the  amounts  received  by  stockholders  are,  in 
effect  and  in  fact,  dividends  received  out  of  the  earnings 
of  the  lessor. 

Return  {corporation). — A  corporation  organized  and  trans- 
acting no  business  within  the  calendar  year  of  its  organiza- 
tion must,  nevertheless,  make  and  file  a  return  on  the  basis 
of  the  calendar  year  unless  such  corporation  shall  designate 
a  fiscal  year  other  than  the  calendar  year  in  the  manner  and 
form  as  provided  for  that  purpose.  The  duty  to  make  a 
return  depends  upon  corporate  or  associational  existence  and 
not  upon  the  receipt  of  income. 

Return  period. — The  return  for  a  completed  period  must 
be  made  independently  of  any  other  period.  A  corporation 
changing  from  the  basis  of  a  calendar  year  to  a  fiscal  year, 
and  because  of  said  change  having  a  part  of  the  calendar  year 
for  which  return  is  to  be  made,  will  be  required  to  make  a 
separate  return  for  the  fraction  of  the  calendar  year,  and 
another  separate  return  for  the  entire  fiscal  year;  as  June 
30  being  designated  as  the  end  of  the  fiscal  year,  the  part  of 
the  calendar  year  from  January  1  to  June  30  must  be  cov- 
ered in  a  return  to  be  made  on  or  before  March  1  then  fol- 
lowing, and  on  or  before  60  days  next  following  June  30 
(next  after  the  filing  of  return  for  the  fractional  part  of  a 
calendar  year)  a  return  must  be  made  and  filed  for  the  entire 
fiscal  year  of  the  corporation.     (T.  D.  2029.) 


Treasury  Department  Special  Rulings         261 
(T.  I).  2109— See  page  216.) 


(T.  D.  2130.) 

Corporation  Income  Tor. 

(See  correction  T.  D.  2161,  page  2.) 

T.  D.  2005  not  applicable  to  returns  made  for  1909  to  1912,  inclusive, 
if  values  of  securities  were  treated  in  returns  for  that  period  in 
accordance  with  regulations  then  in  force,  in  which  case  no 
reopening  or  readjustment  of  securities  account  will  be  required. 

Reference  is  made  to  T.  D.  2005,  which  holds,  in  effect, 
that  neither  increase  nor  shrinkage  in  the  book  value  of  secur- 
ities due  to  market  fluctuations  or  otherwise  is  to  be  taken 
into  account  in  making  returns  of  annual  net  income  as 
required  by  section  2,  act  of  October  3,  1913. 

Numerous  inquiries  have  been  made  as  to  whether  or  not 
the  terms  of  this  Treasury  decision  are  applicable  to  returns 
made  under  the  special  excise  tax  law.  (Sec.  38,  act  of 
Aug.  5,  1909.) 

Relative  to  this,  it  is  held  that  if  returns  made  for  the 
years  1909  to  1913,  inclusive,  were  made  strictly  in  accord 
with  the  regulations  then  in  force — that  is,  if  the  increase  in 
the  book  values  of  securities  was  returned  as  income  and  the 
shrinkage  was  deducted  from  gross  income,  as  the  regulations 
then  required  and  permitted — no  readjustment  of  the  in- 
come in  so  far  as  it  is  affected  by  the  adjusted  values  of 
securities  need  now  be  made.  The  return  as  to  this  item  will 
be  accepted  as  correct  and  final  where  the  adjustment  was 
made  in  the  ordinary  course  of  business  and  without  refer- 
ence to  the  special  excise  tax  on  corporations. 

In  all  such  cases  wherein  the  book  values  of  the  securities 
were  taken  into  account  in  making  returns  for  the  years  1909 
to  1912,  inclusive,  if  such  securities  have  been,  or  shall  be 
hereafter,  sold  or  otherwise  disposed  of,  the  gain  or  loss  re- 
sulting from  such  sale  or  disposal  will  be  determined  upon 
the  basis  of  the  difference  between  the  last  adjusted  value 


262  Federal  Income  Tax 

subsequent  to  January  1,  1909,  taken  into  account  in  mak- 
ing the  return  and  the  amount  realized  for  the  securities 
when  disposed  of,  and  in  this  event  no  prorating  will  be 
required  or  permitted. 

If  for  the  purpose  of  the  special  excise  tax  no  adjustment 
of  the  value  of  securities  acquired  prior  to  January  1,  1909, 
had  been  made  or  taken  into  either  side  of  the  account  in  the 
return  of  annual  net  income  subsequent  to  January  1,  1909, 
the  gain  or  loss  will  be  determined  in  accordance  with  the 
rule  set  out  in  T.  D.  2005 ;  that  is,  the  gain  or  loss  will  be 
determined  on  the  basis  of  the  difference  between  the  actual 
cost  and  selling  price  and  prorated  according  to  the  number 
of  years  the  securities  were  held. 

Therefore,  if,  in  the  examination  of  the  books  of  corpora- 
tions, examining  officers  find  that  the  securities  account  was 
treated  in  the  returns  for  the  years  1909  to  1912,  inclusive, 
in  accordance  with  the  regulations  then  in  force,  no  reopen- 
ing or  readjustment  of  this  account  will  be  required.  In 
such  case,  as  to  this  item,  the  returns  will  be  considered  final 
and  correct,  the  gain  or  loss  resulting  from  the  disposal 
thereafter  of  such  securities  to  be  determined  in  accordance 
with  the  instructions  hereinbefore  given. 


(T.  D.  2131.) 

Use  of  Form  1008,  revised,  for  claiming  refundment  of  normal  tax 
withheld  in  excess  of  total  tax  liability. 

There  follows  a  synopsis  of  the  requirements  in  the  use  of 
Form  1008,  revised,  and  the  relation  between  that  form  and 
Form  1040,  revised. 

1.  A  person  who  has  had  income  tax  withheld  from  his 
income  during  the  year  1914  in  excess  of  his  total  liability 
for  the  normal  tax  should  file  Form  1008,  revised,  with  either 
the  withholding  agent  or  the  collector  of  internal  revenue  with 
whom  the  withholding  agent's  return  is  required  to  be  filed, 
as  he  may  elect.    The  withholding  agent  is  required  by  T.  D. 


Treasury  Department  Special  Rulings         263 

19G5  to  retain  the  amount  of  tax  withheld  by  him  until  30 
.days  prior  to  March  1,  1915,  in  order  to  refund  amounts 
withheld  in  excess  of  the  taxpayer's  liability  for  the  normal 
tax  should  a  proper  claim  be  filed  for  deductions  and  exemp- 
tions. He  is  required  by  law  to  file  his  return  on  or  before 
March  1,  1915,  and  may,  in  his  discretion,  file  his  return 
on  any  date  between  January  1  and  March  1.  If  he  has  filed 
his  return  with  the  collector,  Form  1008,  revised,  should  also 
be  filed  with  the  collector,  who  will  notify  the  withholding 
agent  and  authorize  him  to  make  a  refundment,  changing  the 
entry  on  the  return  and  filing  therewith  Form  1008,  revised, 
as  a  voucher  for  the  refundment.  If,  however,  the  withhold- 
ing agent  has  not  filed  his  return,  and  a  claim  on  Form  1008, 
revised,  is  filed  with  him,  he  will  make  the  proper  refund- 
ment on  his  own  responsibility,  filing  Form  1008,  revised, 
as  a  voucher  therefor.  If  Form  1008,  revised,  is  filed  with 
the  collector  under  these  circumstances,  he  will  authorize 
the  withholding  agent  to  make  refundment.  The  withholding 
agent  is  not  required  by  law  to  forward  to  the  collector  the 
•tax  withheld  by  him  until  he  has  received  notice  of  assess- 
ment, and  then,  like  the  tax  assessed  in  other  cases,  payment 
should  be  made  by  him  on  or  before  June  30  of  each  year. 

2.  Where  there  are  two  or  more  withholding  agents  whose 
collection  districts  are  the  same,  Form  1008,  revised,  should 
be  filed  with  the  collector  of  that  district,  and  a  statement  set- 
ting forth  the  names  of  the  withholding  agents  and  the 
amounts  withheld  by  each  should  be  attached  to  the  form. 
The  collector  will  then  notify  the  withholding  agents  of  the 
exact  amount  that  may  be  refunded  by  each. 

3.  Where  excess  deductions  have  been  made  by  two  or 
more  withholding  agents  in  different  collection  districts, 
Form  100S,  revised,  may  be  filed  with  either  collector,  as  the 
individual  may  elect ;  and  there  should  be  attached  to  the 
form  a  complete  statement  setting  forth  the  names  of  all 
withholding  agents,  the  amounts  withheld  by  each,  and  the 
exact  amount  claimed  as  a  refundment  from  each.  The  col- 
lector with  whom  the  statement  is  filed  will  accept  it  as  a 
part  of  Form  1008,  revised,  and  as  subject  to  the  penalties 


264  Federal  Income  Tax 

imposed  by  law,  and  will  notify  the  withholding  agents, 
whether  in  his  district  or  other  districts,  to  make  the  refund- 
ment claimed  from  each. 

4.  It  is  to  be  noted  that  this  ruling  provides  for  the  exe- 
cution by  the  taxpayer  of  only  one  Fonn  1008,  revised,  cov- 
ering all  the  general  deductions  and  exemptions  claimed  by 
him  for  the  tax  year. 

5.  The  adjustment  of  total  tax  liability  by  the  use  of  Form 
1008,  revised,  does  not,  necessarily,  mean  that  a  return  on 
Form  1040,  revised,  is  not  required  under  the  law. 

A  return  of  annual  net  income  on  Form  1040,  revised,  is 
required  in  all  cases  of  individual  incomes  subject  to  the  tax, 
except  where  the  individual's  tax  liability  is  required  by 
law  to  be  satisfied  at  the  source. 

In  other  words,  when  an  individual  is  liable  for  the  nor- 
mal tax,  only,  and  his  entire  net  income  is  subject  to  with- 
holding, no  return  on  Form  1040,  revised,  is  required  to  be 
filed.  If,  however,  his  net  income  includes  any  item  that 
is  not  subject  to  withholding,  a  return  on  Form  1040,  re- 
vised, is  required  to  be  filed,  although  no  further  tax  may  be 
due,  and  whether  or  not  Form  1008,  revised,  has  been  filed. 


(T.  D.  2135.) 

Synopsis  of  rulings  on  questions  relating  to  the  income  tax  imposed 
by  section  2  of  the  act  of  October  3,  1913. 

The  following  synopsis  of  rulings  on  questions  relating  to 
the  income  tax  imposed  by  section  2  of  the  act  of  October  3, 
1913,  on  individuals,  corporations,  joint-stock  companies,  as- 
sociations, and  insurance  companies  is  published  for  the 
information  of  internal-revenue  officers  and  others  concerned. 
All  rulings  or  parts  of  rulings  heretofore  made  which  are  in 
conflict  herewith  are  hereby  revoked. 

Accident  insurance. — Money  paid  to  the  person  insured  by 
an  accident  insurance  policy  on  account  of  accidents  sus- 
tained is  returnable  as  gross  income  by  the  insured  person. 


Treasury  Department  Speoiai   Rulings         265 

The  proceeds  of  accident  insurance  policies  paid  upon  the 
death  of  the  person  insured  to  the  beneficiaries  is  to  be 
treated  like  the  proceeds  of  life  insurance  policies. 

Administration  of  estates,  expenses  of. — Referring  to  the 
difference  between  the  expenses  of  administration  of  estates, 
set  forth  as  not  allowable  deductions  in  T.  D.  2090,  and  the 
expenses  itemized  as  allowable  deductions  on  Form  1041,  re- 
vised, the  distinction  is  sought  to  be  made  between  such  first 
expenses  as  are  properly  chargeable  against  an  estate  as  an 
entity,  and  such  other  expenses  incident  to  administration 
as  may  arise  from  the  nature  of  the  properties  and  the  details 
of  business  management. 

Among  the  former,  T.  D.  2090  cites  court  costs,  attorneys' 
fees,  executors'  commissions,  etc.,  and  among  the  latter  may 
be  cited  the  usual  and  necessary  expenses  of  carrying  on 
a  business,  including  salaries,  wages,  and  rentals  paid,  and 
such  repairs  to  business  properties  as  do  not  constitute  perma- 
nent improvements  or  betterments  which  increase  the  value 
of  the  property  or  estate.  The  former  is  meant  to  apply  to 
expenses  that  i-educe  the  estate  in  the  administrator's  hands, 
and  the  latter  to  legitimate  expenses  that  reduce  the  income 
accruing  to  beneficiaries,  but  not  the  estate  itself. 

Agent. — An  agent  having  entire  charge  of  property  with 
authority  to  effect  and  execute  leases  with  tenants  entirely  on 
his  own  responsibility,  and  without  consulting  his  principal, 
paying  taxes  and  expenses  and  all  other  charges  in  connection 
with  the  property  out  of  funds  in  his  hands  from  collection 
of  rents,  merely  turning  over  the  net  proceeds  from  the  prop- 
erty periodically  to  his  principal  by  virtue  of  authority  con- 
ferred upon  him  by  a  power  of  attorney,  is  not  a  fiduciary 
within  the  meaning  of  the  income  tax  law. 

Agent  for  a  nonresident,  alien. — An  agent,  whether  an  indi- 
vidual or  a  corporation,  for  a  nonresident  alien  stands  in  the 
place  of  the  principal  and  should  execute  Form  1040,  revised, 
for  the  principal  when  the  principal  is  liable  for  the  tax  on 
income  passing  through  the  agent's  hands.  As  a  nonresident 
alien  is  not  subject  to  the  tax  on  income  derived  from  stocks 
and  bonds  of  domestic  corporations,  no  return  is  required  to 


266  Federal  Income  Tax 

be  made  by  an  agent  in  such  a  case.     (See  Aliens,  nonresi- 
dent, income  from  mortgages  accruing  to.) 

Agents,  withholding,  responsibility  of,  for  refundment 
when  Form  1008,  revised,  is  filed. — No  penalty  attaches  to 
the  action  of  a  withholding  agent  in  refunding  amounts 
improperly  claimed  in  Form  1008,  revised,  properly  exe- 
cuted, when  the  refundment  is  made  in  good  faith  and  with- 
out intention  to  defraud  tho  Government. 

Withholding  agents  should  be  aware  of  the  fact  that  the 
assessment  will  be  made  on  their  returns  by  this  office  in 
the  light  of  the  facts  shown  by  the  certificates  and  the  Form 
1008,  revised,  attached  to  their  returns ;  and  that  reasonable 
care,  under  the  penalties  of  law,  is  to  be  exercised  in  the 
performance  of  the  duties  imposed  upon  them  by  law. 

When  it  is  apparent  on  the  face  of  Form  1008,  revised, 
and  from  the  facts  in  possession  of  the  withholding  agent 
that  the  claim  is  either  erroneous  or  fraudulent,  refundment 
should  be  denied.  In  such  a  case  the  claimant  has  proper 
redress  by  means  of  a  claim  for  abatement  or  refundment 
as  provided  by  Article  33  (c),  Regulations  No.  33,  of  Janu- 
ary 5,  1914. 

The  same  care  should  be  exercised  by  collectors  in  author- 
izing refundment  as  would  be  expected  of  withholding  agents 
in  cases  of  refundment  made  on  their  own  responsibility. 

Bank  stock,  taxes  paid  by  banks  on,  held  by  individuals. — 
Taxes  assessed  against  the  stockholders  of  a  bank  and  paid 
by  the  bank  in  behalf  of  the  stockholders  do  not  constitute 
an  allowable  deduction  from  the  gross  income  of  the  bank, 
but  do  constitute  an  allowable  deduction  in  the  return  of 
the  individual.  If  such  individual  is  subject  to  the  addi- 
tional tax,  the  amount  of  taxes  so  paid  should  be  included  in 
his  return  as  income,  the  said  amount  being  considered  as 
an  additional  dividend  to  the  amount  of  the  taxes  paid. 

Citizenship. — Determination  by  the  State  Department  of 
right  to  registry  is  not  conclusive  upon  the  Treasury  in  fixing 
citizenship  for  income-tax  purposes.  Held,  that  native  and 
naturalized  status  remains  unless  changed  by  affirmative 
action  or  forfeited  by  overt  act. 


Treasury  Department  Special  Eulings         267 

Collecting  agent,  duties  of,  when  no  certificate  is  filed. — 
The  first  bank  or  collecting  agency  receiving  an  interest  cou- 
pon from  a  domestic  bond,  unaccompanied  by  a  certificate  of 
ownership,  shall  withhold  the  normal  tax  of  1  per  cent  and 
execute  Form  1002.  The  amount  of  tax  withheld  should  be 
reported  by  the  bank  or  collecting  agency  on  monthly  list 
return,  Form  1044.  The  certificate  should  accompany  the 
coupon  to  the  debtor  corporation  in  order  that  the  normal  tax 
may  not  be  withheld  again  should  the  coupons  pass  through 
the  hands  of  other  banks  or  collecting  agencies.  The  debtor 
corporation,  upon  receipt  of  Form  1002,  should  treat  such 
certificate  as  an  exemption  certificate. 

Compensation. — If  an  employee's  total  compensation,  sal- 
ary, and  bonus  is  fixed,  determined,  and  paid  to  him  at  one 
time,  withholding  should  occur  at  that  time;  and  both  the 
company's  withholding  return  and  the  employee's  individual 
return  of  income  for  the  year  in  which  the  amount  is  thus 
determined  and  paid  should  take  consideration  of  the  item. 
It  follows  that  where  a  part  of  the  compensation  is  in  the 
form  of  a  salary  payable  monthly,  and  a  part  in  the  form  of 
a  bonus  not  fixed  and  determined  until  on  or  after  January 
1  of  the  year  following  that  in  which  the  services  were  ren- 
dered, the  two  parts  of  any  one  year's  compensation  can  not 
be  considered  together  for  the  purposes  of  withholding  the 
tax  and  making  return ;  but  the  fixed  salary  of  one  year 
should  be  considered  together  with  the  bonus  received  on  or 
after  January  1  of  that  year.  Thus,  if  the  services  were  ren- 
dered in  the  year  1914  the  employee's  compensation  would 
be  liable  to  withholding  whenever  the  fixed  salary  and  the 
bonus  paid  on  or  after  January  1,  1914,  amounted  to  $3,000, 
subject  to  the  exemption  claimed  under  the  law.  The  bonus 
to  be  paid  on  or  after  January  1,  1915,  will  belong  to  the 
tax  year  1915,  together  with  the  fixed  salary  received  dur- 
ing 1915. 

Compensation  for  services  as  trustee. — If  no  determina- 
tion was  made  of  the  amount  due  the  trustee  of  an  estate  as 
compensation  for  his  services  over  a  period  of  years  until  the 
trust  was  terminated,  the  amount  allowed  him  should  be  re- 


268  Federal  Income  Tax 

turned  in  full,  subject  to  allowable  deductions,  as  income  for 
the  year  in  which  paid,  and  should  not  be  prorated  over  the 
length  of  time  during  which  he  served  as  trustee. 

Damages. — An  amount  received  as  the  result  of  a  suit  or 
compromise  for  "pain  and  suffering''  is  held  to  be  such  in- 
come as  would  be  taxable  under  the  provision  of  law  that 
includes  "gains  or  profits  and  income  derived  from  any 
source  whatever."  An  amount  thus  received  would  be,  in 
its  nature,  similar  to  an  amount  paid  to  a  person  insured  by 
an  accident  insurance  policy  on  account  of  an  accident  sus- 
tained. 

Disbursing  officer,  withholding  by,  to  be  governed  by 
amounts  paid  by  him  alone.— An  effort  has  been  made  to 
meet  the  views  of  certain  departments  that  withholding 
should  occur  from  the  aggregate  amounts  received  by  an 
individual  from  the  various  disbursing  officers  within  a  de- 
partment; but,  after  further  and  careful  consideration  of 
both  the  law  and  the  administrative  features  involved,  it  has 
been  determined  that  each  disbursing  officer  must  be  gov- 
erned by  the  amounts  paid  by  him  alone,  and  that  it  is  not 
incumbent  upon  him  to  ascertain  and  take  into  consideration 
amounts  that  may  have  been  paid  or  may  be  paid  by  other 
disbursing  officers. 

This  view  is  in  full  accord  with  the  provisions  of  the  in- 
come tax  law  which  makes  "all  officers  and  employees  of  the 
United  States  having  the  control,  receipt,  custody,  disposal, 
or  payment,"  etc,  personally  liable  for  the  normal  tax  of  1 
per  cent  on  amounts  passing  through  their  hands,  subject  to 
the  character  and  amount  of  income  and  the  exempions  fixed 
by  law. 

All  rulings  heretofore  made  on  the  subject,  by  letter  or 
otherwise,  that  are  in  conflict  herewith,  are  hereby  overruled 
and  superseded. 

Dividends  on  stoclc  of  corporations  subject  to  tax,  when 
returnable. — Persons  having  an  annual  net  income  of  $3,000 
or  more,  including  the  income  derived  from  dividends  or  net 
earnings  of  corporations,  etc.,  subject  to  tax,  but  whose  total 
net  income  is  less  than  $20,000,  and  whose  net  income,  ex- 


Treasury  Department  Special  Rulings         269 

elusive  of  the  income  derived  from  dividends  or  net  earnings 
of  such  corporations,  etc.,  is  less  than  $3,000  for  the  taxable 
year,  are  not  required  to  make  a  return  of  annual  net  income. 

Exemption  (paragraph  C). — A  husband  who  has  a  wife 
and  children  whom  he  supports,  but  who  is  living  apart  from 
his  wife  under  an  agreement  to  do  so,  there  being  no  judicial 
decree  of  separation,  is  entitled  only  to  the  specific  exemp- 
tion of  $3,000. 

Exemption,  specific,  amounts  of,  allowed  deceased  hus- 
band and  widow  in  same  tax  year. — In  the  return,  if  the 
amount  of  income  necessitates  one,  the  decedent's  specific  ex- 
emption for  the  entire  year  ($4,000)  should  be  claimed. 

The  widow  is  required  to  file  a  return  on  Form  1040,  re- 
vised, in  her  own  behalf  if  her  entire  income  for  the  calendar 
year  during  which  her  husband  died  amounted  to  $3,000  or 
more,  and  should  claim  a  specific  exemption  of  $3,000  if 
not  in  a  married  status,  living  with  a  husband,  on  December 
31  of  that  year. 

Income  of  wife  from  sale  of  special  articles  is  to  be  included 
in  husband's  return,  when. — Unless  the  wife  has  a  separate 
estate  which  requires  her  to  file  a  separate  return  of  income 
or  to  join  with  her  husband  in  a  return  which  shall  set  forth 
her  income  separately,  a  husband  having  a  taxable  income  of 
his  own  should  include  in  his  return  the  income  accruing  to 
the  wife  from  the  sale  of  special  magazine  articles.  If 
neither  has  a  net  income  of  $3,000  or  more,  but  together  they 
have  an  aggregate  net  income  exceeding  $4,000,  a  return  of 
the  joint  income  is  required  to  be  filed  by  either  the  husband 
or  wife,  and  the  income  derived  by  the  wife  as  above  set  forth 
should  be  included  in  such  return.  The  actual  proceeds  com- 
ing into  the  wife's  possession  during  the  tax  year  constitute 
the  income  to  be  included,  and  not  the  amounts  estimated 
upon  acceptance  prior  to  publication  and  payment. 

Income  tax  as  an  allowable  deduction. — For  the  purpose 
of  claiming  as  allowable  deductions  the  amounts  paid  to  the 
collector  and  the  amounts  withheld  at  the  source  on  account 
of  the  income  tax,  it  is  held  that  amounts  of  both  classes  are 
paid,  within  the  meaning  of  the  law,  in  the  year  in  which 


270  Fedeeal  Income  Tax 

assessment  is  made  and  the  tax  paid  to  the  collector  of  in- 
ternal revenue. 

Information  from  withholding  returns  of  income. — The 
income  tax  law  is  specific  and  mandatory  in  the  matter  of 
safeguarding  from  publicity  the  information  acquired  by 
reason  of  its  requirements  relative  to  annual  returns  of  in- 
come. The  law  imposes  the  penalty  of  "fine,  imprisonment, 
dismissal  from  office,  and  forfeiture  of  right  to  hold  office, 
for  making  known  in  any  manner  not  provided  by  law  the 
*  *  *  amount  or  source  of  income  *  *  *  or  any  par- 
ticular thereof  *  *  *  set  forth  or  disclosed  in  any  in- 
come return  by  any  person     *     *     *     ." 

The  law  does  not  provide  for  supplying  corporations  with  a 
list  of  their  bondholders  drawn  from  withholding  returns 
of  income. 

Loss. — (1)  A  person  may  have  more  than  one  business  in 
the  sense  of  being  engaged  in  more  than  one  trade,  and  may 
deduct  losses  incurred  in  all  of  them,  provided  that  in  each 
trade  it  can  be  clearly  shown  that  he  is  actually  a  dealer,  or 
trader,  or  manufacturer,  or  whatever  the  occupation  may 
be.  Neither  the  investment  by  an  individual  of  money  in 
the  stock  of  a  company  nor  the  employment  by  the  company 
of  his  services  in  any  official  capacity  can  serve  to  make  the 
business  in  which  the  company  was  engaged  a  matter  of  his 
individual  trade. 

(2)  A  loss  is  none  the  less  actual  because  an  individual 
can  not  divest  himself  of  the  possession  of  worthless  stock  by 
sale,  but  that  condition  alone  does  not  give  the  loss  in  ques- 
tion such  a  character  as  appears  to  the  department  to  have 
been  contemplated  by  the  income  tax  law. 

Losses  in  trade. — "A  person  not  a  recognized  or  licensed 
dealer  in  stocks  and  bonds  makes  $5,000  profit  during  the 
year  on  a  stock  purchase  and  sale,  and  makes  a  loss  during 
the  same  year  on  a  stock  purchase  and  sale  of  $4,000.  Is  it 
correct  to  return  this  difference  of  $1,000  in  gains,  or  should 
the  entire  $5,000  be  returned  as  gain  ?" 

This  office  holds  that  the  profit  of  $5,000  is  income  to  be 
included  in  a  return  of  income,  and  that  the  $4,000  is  not 


Treasury  Department  Special  Rulings         271 

such  a  loss  as  may  be  deducted  in  a  return  of  income,  for  the 
reason  that  it  is  not  incurred  "in  trade"  within  the  accepted 
definition  of  that  term. 

Penalty  of  50  per  cent  additional  tax. — The  income  tax 
law  is  explicit  and  mandatory  in  its  provisions  relative  to 
the  additional  assessment  of  50  per  cent  of  the  tax  otherwise 
due,  in  case  of  failure  to  file  a  return  of  income  within  the 
prescribed  time,  and  does  not  give  discretionary  authority  of 
remission  of  this  additional  tax  to  any  officer  of  the  Gov- 
ernment. 

Reimbursement  of  expenses. — Amounts  received  from  a 
railroad  company  by  way  of  reimbursement  for  expenses  inci- 
dent to  an  accident  are  not  subject  to  the  income  tax. 

Rental:  Board,  lodging,  or  other  consideration  received  in 
lieu  of  cash. — Board,  lodging,  or  other  consideration  re- 
ceived in  lieu  of  rental  is  considered  income  equal  in  amount 
to  the  indebtedness  in  payment  of  which  it  is  received,  and 
should  be  included  in  any  return  of  annual  net  income  its 
recipient  is  required  to  render  under  the  provisions  of  the 
income  tax  law. 

Rental:  Permanent  improvements  made  under  contract  in 
addition  to  yearly. — Where  a  tenant  enters  into  a  contract 
under  which  he  agrees  to  pay  a  yearly  rental  of  a  fixed  sum, 
and  in  addition  agrees  to  expend  during  the  rental  period 
a  certain  fixed  sum  in  making  improvements,  or  where  he 
agrees  to  erect  a  building  of  a  certain  size,  quality,  and 
style  of  architecture  in  addition  to  a  fixed  annual  rental,  the 
amount  expended  in  accordance  with  the  contract  in  making 
permanent  improvements,  or  in  the  erection  of  the  building, 
forms  part  of  the  consideration  named  for  the  rental  of  the 
property,  and  the  amount  thus  expended  actually  accrues  to 
the  benefit  of  the  landlord  and  is,  in  effect,  an  advance  pay- 
ment of  rental  which  is  held  to  be  income  to  the  landlord  at 
the  time  of  its  expenditure,  and  the  tax  computed  on  the 
amount  expended  for  improvements  should  be  deducted  and 
withheld  by  the  tenant,  subject  to  authorized  exemptions 
claimed,  for  the  taxable  vear  in  which  the  benefits  of  such 


272  Federal  Income  Tax 

expenditures  accrued  to  the  landlord,  and  not  be  prorated 
over  the  full  period  of  the  lease  term. 

Return  on  Form  1040,  revised. — A  return  on  Form  1040, 
revised,  is  not  required  in  cases  where  the  individual's  tax 
liability  has  been  or  is  to  be  paid  at  the  source.  In  other 
words,  when  an  individual  is  liable  for  the  normal  tax  only, 
and  his  entire  net  income  is  subject  to  withholding,  no  return 
on  Form  1040,  revised,  is  required  under  the  law.  If  his 
net  income,  not  taking  his  specific  exemption  into  considera- 
tion, includes  items  that  are  not  subject  to  withholding,  a 
return  on  Form  1040,  revised,  is  required,  although  no  tax 
may  be  due. 

Undivided  surplus  of  corporations,  individual  distributive 
interest  in. — Subdivision  2  of  paragraph  A,  income  tax  law 
of  October  3,  1913,  imposes  no  duty  on  the  taxpayer  to 
ascertain  his  distributive  interest  in  the  undivided  surplus 
of  corporations  for  the  purpose  of  making  return  of  the 
amount,  in  addition  to  the  amount  of  dividends  declared  on 
his  stock,  unless  the  Secretary  of  the  Treasury  has  certified 
that,  in  his  opinion,  such  accumulation  is  unreasonable  for 
the  purposes  of  the  business. 

Withholding  agent,  requirements  of,  on  obligations  other 
than  bonds. — All  persons  having  the  control  or  payment  of 
annual  income  of  another  person  exceeding  $3,000,  such 
income  being  derived  from  fixed  or  determinable  annual 
gains — such  as  the  payment  of  interest  upon  the  obligation  of 
individuals,  salaries,  rents,  wages,  etc.— shall  when  the  ag- 
gregate payments  exceed  $3,000,  withhold  the  normal  tax  of 
1  per  cent  upon  the  entire  amount  unless  exemption  is 
claimed,  and  then  only  on  the  amount  in  excess  of  the  ex- 
emption so  claimed.  Any  tax  withheld  from  income  derived 
from  this  class  of  obligations  should  be  reported  by  the 
debtor  or  withholding  agent  on  annual  list  return,  Form 
1042,  which  should  be  filed  with  the  collector  of  internal 
revenue  for  the  district  in  which  the  debtor  or  withholding 
agent  is  located,  and  all  certificates  received  during  the  year 
should  accompany  this  return.  When  certificates  have  been 
filed  claiming  exemption  to  the  full  extent  of  the  payments 


Treasury  Department  Special  Rulings         273 

made,  no  return  is  required;  but  the  certificates  should  be 
forwarded  to  the  proper  collector  of  interanl  revenue.  The 
annual  return,  or  the  certificates,  or  both,  as  the  case  may 
be,  should  be  forwarded  to  the  collector  of  internal  revenue 
subsequent  to  the  end  of  the  calendar  year  and  not  later  than 
March  1  of  the  succeeding  year.  The  amount  withheld, 
however,  should  not  be  forwarded  to  the  collector  until  30 
days  prior  to  March  1  of  the  year  succeeding  that  in  which 
the  tax  was  withheld. 

Withholding  agent's  return  when  Form  1008,  revised,  has 
oeen  filed. — The  entries  on  Form  1042  should  be  made  by  a 
withholding  agent  from  the  facts  before  him  after  he  has  re- 
ceived the  authority  of  the  collector  for  the  refundment  of 
a  part  of  the  amount  previously  withheld.  When  he  has 
received  notification  of  the  amount  of  tax  to  be  refunded, 
he  has  sufficient  information  to  make  correct  entries  on  the 
form. 

Thus,  when  a  withholding  agent  has  been  authorized  by 
a  collector  to  refund,  say,  $10,  he  will  reduce  the  amount 
otherwise  to  be  entered  in  the  column  headed  "Amount  of 
tax  withheld"  by  $10 ;  he  will  reduce  the  amount  otherwise 
to  be  entered  in  the  column  headed  "Amount  of  income  on 
which  withholding  agent  is  liable  for  tax"  by  $1,000 ;  he 
will  increase  the  amount  otherwise  to  be  entered  in  column 
headed  "Amount  of  exemption  claimed"  by  $1,000,  and 
may  change  the  heading  to  read  "Amount  of  exemption  and 
deductions  claimed,"  if  desired.  The  figures  to  be  entered  in 
the  column  headed  "Amount  of  income"  will  remain  the 
same,  that  amount  being  the  actual  amount  passing  through 
the  hands  of  the  withholding  agent,  whether  or  not  Form 
1008,  revised,  is  filed. 

Withholding  from  compensation  paid  at  a  per  diem  rate. — 
Per  diem  salaries  paid  on  a  straight  basis  of  compensation 
for  services  rendered  are  subject  to  withholding  at  the  source, 
the  amount  of  compensation  being  fixed  and  periodic.  If, 
however,  a  per  diem  salary  rate  is  paid  and  the  employee  is 
required  by  the  terms  of  his  employment  or  contract  to  pay 
therefrom  his  own  travel  or  other  legitimate  expenses  incident 
18 


274  Fedekal  Income  Tax 

to  the  business  of  his  employment,  the  income  accruing  to  him 
from  the  per  diem  rate  is  not  subject  to  withholding,  the 
amount  not  being  fixed  or  determinable. 

Withholding  returns  required  of  corporations  or  their  duly 
authorized  withholding  agents. — A  corporation,  having 
bonded  indebtedness,  which  has  withheld  income  tax  during 
the  preceding  month  is  required  to  file  a  monthly  list  return, 
Form  1012,  showing  the  amount  of  tax  withheld.  Certifi- 
cates of  ownership  in  which  exemption  is  claimed  to  the  ex- 
tent of  the  amount  of  payment  need  not  be  listed,  and  if  this 
is  the  only  class  of  certificates  received  during  the  said  pre- 
ceding month,  no  return  is  required.  However,  such  certifi- 
cates should  be  forwarded  to  the  proper  collector  of  internal 
revenue,  together  with  a  letter  of  transmittal. 

The  return  should  be  filed  with  the  collector  of  internal 
revenue  for  the  district  in  which  the  debtor  corporation  is 
located  or  has  its  principal  place  of  business,  provided  the  said 
debtor  corporation  has  not  filed  with  the  said  collector  of 
internal  revenue  a  notice  of  the  appointment  of  a  duly  author- 
ized withholding  agent,  in  which  case  the  debtor  corporation 
is  not  required  to  file  a  monthly  list  return,  Form  1012,  or  the 
corresponding  annual  list  return,  Form  1013. 

This  notice  of  appointment  should  be  placed  on  file  in  the 
office  of  the  collector  of  internal  revenue  for  the  district  in 
which  the  debtor  corporation  is  located  or  has  its  principal 
place  of  business,  and  the  said  collector  should  notify  the  col- 
lector of  internal  revenue  for  the  district  in  which  the  duly 
authorized  withholding  agent  is  located.  The  duly  author- 
ized withholding  agent  is  required  to  file  its  return  with  the 
collector  of  internal  revenue  for  the  district  in  which  the  said 
withholding  agent  is  located,  and  is  not  required  to  file  a 
return  with  the  collector  for  the  district  in  which  the  debtor 
corporation  is  located. 


Treasury  Department  Special  Rulings         275 

(T.  D.  2137.) 

Synopsis  of  rulings  on  questions  relating  to  the  income  tax  imposed 
by  section  2  of  the  act  of  October  3,  1913. 

The  following  synopsis  of  rulings  on  questions  relating  to 
the  income  tax  imposed  by  section  2  of  the  act  of  October  3, 
1913,  on  individuals,  corporations,  joint-stock  companies, 
associations,  and  insurance  companies,  is  published  for  the 
information  of  internal-revenue  officers  and  others  concerned. 
All  rulings  or  parts  of  rulings  heretofore  made  which  are  in 
conflict  herewith  are  hereby  revoked. 

Part  I. — Rulings  in  Relation  to  Personal  Income  Tax. 

Aliens,  nonresident,  royalties  paid  to. — Royalties  paid  to 
nonresident  aliens  under  an  agreement  of  purchase  of  certain 
patent  rights,  the  payments  being  based  upon  the  quantity  of 
goods  produced  by  the  use  of  such  patents,  are  held  to  be 
income  accruing  to  nonresident  aliens  by  reason  of  property 
owned  or  business  carried  on  within  the  United  States;  and, 
as  provided  in  T.  D.  2109  of  December  28,  1914,  the  cor- 
poration or  individual  purchasing  and  using  the  patent  rights 
is  required  to  make  full  and  complete  returns  of  the  income 
therefrom  on  Form  1040,  revised,  and  to  pay  any  and  all  tax, 
normal  and  additional,  assessed  upon  such  income  of  said 
nonresident  aliens. 

Commission  retained  by  agent  on  his  own  life  insurance 
policy. — A  commission  retained  by  a  life  insurance  agent  on 
his  own  life  insurance  policy  is  held  to  be  income  accruing  to 
the  agent,  and  should  be  included  in  his  return  of  income  for 
the  assessment  of  the  income  tax. 

Deductions:  Expenses  incurred  in  connection  with  salary 
received  from  a  State  or  a  political  subdivision  thereof  not 
allowable. — Expenses  incurred  in  earning  income  which  is 
not  subject  to  tax  under  the  income  tax  law  do  not  constitute 
allowable  deductions  in  computing  net  income  from  other 
sources  which  are  taxable  under  the  law. 


276  Fedebal  Income  Tax 

Husband  and  wife,  separate  incomes  of. — The  specific  ex- 
emption of  $4,000  may  be  claimed  in  the  separate  return  of 
either  husband  or  wife,  the  other  claiming  no  exemption;  or 
may  be  prorated  between  the  two. 

The  separate  incomes  of  husband  and  wife  should  not  be 
combined  in  a  return  of  income  for  the  purpose  of  assessing 
the  additional  or  surtax. 

Life  insurance. — Dividends  paid  on  life  insurance  policies 
that  have  not  matured,  whether  such  dividends  are  drawn  in 
cash  by  the  insured  or  applied  to  the  reduction  of  the  annual 
premium  due,  are  not  considered  items  of  taxable  income 
under  the  law,  and  should  be  excluded  from  a  return  of 
income. 

Dividends  from  paid-up  policies,  however,  are  considered 
income  to  the  recipient,  and  must  be  included  in  the  annual 
return  of  income  whenever  the  taxpayer's  income,  including 
such  dividends,  is  in  excess  of  $20,000.  They  are  considered 
the  same  as  dividends  or  net  earnings  from  corporations  sub- 
ject to  a  like  tax  and  may,  therefore,  be  excluded  from  a 
return  of  income  in  cases  where  the  income  is  subject  to  the 
normal  tax  of  1  per  cent  only. 

Partnership  returns.— ~No  return  for  a  partnership,  as 
such,  is  required  to  be  made  for  the  year  1914  unless  it  shall 
be  hereafter  specifically  requested.  Form  1065  was  provided 
for  the  returns  of  annual  net  incomes  of  partnerships  for  the 
year  1913,  as  requested  by  circular-letter  No.  2  of  July  31, 
1914,  but  no  similar  request  has  yet  been  made  for  partner- 
ship returns  for  the  year  1914. 

The  individual  members  of  a  partnership  firm  should 
include  in  their  individual  returns  of  income  to  be  filed  on 
Form  1040,  revised,  for  the  calendar  year  1914,  their  re- 
spective distributive  interests  in  the  partnership's  profits  as- 
certained for  the  business  year  ending  on  any  date  in  1914. 
Line  19,  page  2,  of  Form  1040,  revised,  is  provided  for  this 
purpose. 

Powers  of  attorney. — A  person  acting  under  a  power  of 
attorney  in  the  management  of   property  having  no   title 


Treasury  Department  Special  Rulings         277 

thereto  but  with  full  power  and  authority  to  deal  with  the 
property  as  he  sees  fit  is  under  no  obligation  to  render  returns 
as  a  fiduciary.  A  power  of  attorney  does  not  constitute  a  fidu- 
ciary relationship  within  the  meaning  of  the  income  tax  law, 
and  in  all  cases  where  no  legal  trust  has  been  created  in  the 
estate  controlled  by  the  agent  and  attorney  the  liability  under 
the  law  rests  with  the  principal. 

Rents,  withholding  from,  accruing  to  joint  owners. — When 
the  joint  owners  of  rented  property  do  not  desire  to  claim  the 
exemption  allowed  by  paragraph  C  of  the  income  tax  law  and 
merely  wish  to  file  a  statement  with  the  lessees  that  will  show 
the  proportionate  interests  of  the  joint  owners  in  order  that 
the  normal  tax  of  1  per  cent  may  be  properly  deducted,  if  the 
amounts  are  such  as  to  render  deduction  necessary,  from  the 
income  accruing  to  the  individuals,  respectively,  no  certifi- 
cate has  been  prescribed ;  but  the  desired  information  may 
be  imparted  to  the  withholding  agents  by  the  use  of  office 
Certificate  1000,  revised,  adapted  to  rentals,  and  executed  by 
one  of  the  joint  owners. 

Under  these  circumstances  any  proper  statement  of  the 
joint  ownership  that  may  be  made  to  the  lessees  will  be  accept- 
able to  this  office,  as  no  certificate  is  required  to  be  attached 
by  the  withholding  agent  to  his  annual  return  on  Form  1042, 
his  duty  being  fulfilled  by  withholding  the  tax  from  the  indi- 
viduals concerned,  making  the  proper  entries  specified  on  the 
form  relative  to  these  individuals,  and  omitting  the  names 
of  the  individual  joint  owners  whose  interests  were  not  suffi- 
cient in  amount  to  require  a  deduction  of  the  normal  tax. 

Return  by  a  fiduciary. — A  return  of  income  by  a  fiduciary 
is  required  if  the  distributive  interest  of  any  one  beneficiary 
in  the  amount  entered  on  line  5,  page  1  of  Form  1041, 
revised,  exceeds  $3,000. 

Line  5,  page  1  of  Form  1041,  revised,  corresponds  with  line 
3,  page  1  of  Form  1041,  in  use  for  the  tax  year  1913. 

Trustee,  return  of. — The  creator  of  the  trust  in  each  in- 
stance being  the  same  person  and  the  trustee  in  each  instance 
being  the  same,  the  trustee  should  make  a  single  return  on 


278  Federal  Income  Tax 

Form  1041,  revised,  for  all  of  the  trusts  in  his  hands,  not- 
withstanding the  fact  that  they  arise  from  different  instru- 
ments. Where  a  trustee  holds  trusts  created  by  different  per- 
sons for  the  benefit  of  the  same  beneficiaries,  he  should  make 
return  for  each  trust  separately  on  Form  1041,  revised.  It 
is  to  be  noted  that  this  ruling  is  based  on  the  identity  of  the 
creator  and  the  identity  of  the  trustee  of  the  various  trusts, 
and  not  upon  the  identity  of  the  beneficiaries. 

Part  II. — Rulings  in  Relation  to  Corporation  Income  Tax. 

Bond  discount  deductible. — In  the  case  of  a  corporation 
selling  its  own  bonds  at  a  discount,  the  amount  of  the  discount 
should  be  prorated  over  the  life  of  the  bonds,  and  the  propor- 
tionate part  of  such  discount  applicable  to  each  year  during 
the  life  of  the  bonds,  constitutes  an  allowable  deduction  from 
the  gross  income  of  such  year.  The  deduction  from  gross 
income  in  the  case  of  20-year  bonds  would  be  one-twentieth 
of  the  aggregate  amount  of  the  discount  on  the  bonds  sold. 

Discount  on  bonds  issued  prior  to  the  year  1909,  if  such 
discount  was  charged  against  the  income  of  the  year  in  which 
the  bonds  were  sold,  is  held  not  to  be  deductible  from  the  in- 
come of  subsequent  years,  for  the  reason  that  the  charging  off 
prior  to  January  1,  1909,  of  the  entire  amount  of  the  discount 
constitutes  a  closed  transaction,  and  such  transaction  cannot 
be  reopened  for  the  purpose  of  reducing  the  taxable  income 
of  a  corporation  by  deducting  therefrom  an  aliquot  part  of 
the  discount. 

Change  of  name  of  corporation. — The  mere  change  in  name 
does  not  constitute  a  new  corporation.  If  the  business  was 
continuous  throughout  the  year,  no  change  in  management  or 
operation  other  than  the  change  of  name,  the  return  should  be 
made  covering  the  business  transacted  throughout  the  year, 
such  return  to  be  made  by  the  corporation  in  the  name  which 
it  bears  at  the  end  of  the  year,  with  a  notation  on  the  return 
to  the  effect  that  the  name  had  been  changed,  giving  both  the 
old  and  new  names.     If,  however,  a  distinct  new  corporation 


Treasury  Department  Special  Rulings         279 

was  organized  to  take  over  the  property  of  the  old,  both  cor- 
porations will  be  required  to  make  separate  returns  covering 
the  periods  of  the  year  during  which  they  were  respectively 
in  charge  of  the  business. 

Corporation  owned  by  an  organization  exempt,  liable. — A 
stock  corporation  all  of  whose  stock  is  owned  by  "a  corpora- 
tion or  association  organized  and  operated  exclusively  for 
religious,  charitable,  scientific,  or  educational  purposes,  no 
part  of  whose  net  income  inures  to  the  benefit  of  any  mem- 
ber, stockholder,  or  individual,"  is  required  under  the  pro- 
visions of  the  Federal  Income  Tax  Law  to  make  a  return  of 
annual  net  income  and  pay  income  tax. 

The  fact  that  all  of  the  stock  of  the  corporation,  except 
shares  qualifying  the  directors,  is  owned  by  a  corporation 
which  itself  comes  within  the  class  specifically  enumerated  as 
exempt  does  not  relieve  the  firstrnamed  corporation  from  lia- 
bility under  the  income  tax  law.  The  liability  of  a  corpora- 
tion to  the  requirements  of  the  Federal  Income  Tax  Law  is 
not  contingent  upon  the  ownership  of  its  stock. 

Domestic  corporation  doing  foreign  business. — A  domestic 
corporation  doing  the  greater  part  of  its  business  in  the 
United  States  and  having  its  principal  place  of  business  in 
this  country  and  transacting  business  in  Porto  Rico  through 
a  branch  office,  is  required  to  report  in  its  return  of  annual 
net  income  its  entire  earnings  from  all  sources,  including 
those  arising  and  accruing  to  the  branch  in  Porto  Rico  or 
elsewhere. 

The  return  of  such  corporation  will  be  made  to  the  collector 
of  internal  revenue  of  the  district  in  this  country  in  which  is 
located  its  principal  place  of  business. 

Carrying  charges  part  of  the  cost  of  assets. — T.  D.  2005  is 
not  intended  to  lie  so  construed  that  carrying  charges,  if 
they  consist  of  such  expenditures  as  constitute  allowable 
deductions  from  gross  income,  are  to  be  added  to  the  cost  of 
the  property  if  there  is  a  gross  income  from  which  such 
charges  as  constitute  allowable  deductions  may  be  deducted. 
It  is  intended,  however,  that  in  the  case  of  a  holding  or  de- 


280  Federal  Income  Tax 

veloping  company  which  has  not  yet  reached  the  stage  of 
having  any  income  of  consequence  resulting  from  its  cor- 
porate operations,  the  carrying  charges  or  other  excess  over 
the  incidental  income  received  may  be  added  to,  and  made  a 
part  of  the  cost  of  the  property. 

As  a  general  proposition  involving  the  acquirement  and 
holding  of  property  for  future  sale,  which  property  was  ac- 
quired prior  to  the  incidence  of  the  tax  and  from  which 
property  there  is  but  a  nominal  income,  insufficient  to  meet 
the  carrying  charges,  it  would  be  proper  for  the  corporation 
to  add  to  the  initial  cost  of  the  property  the  carrying  charges, 
such  as  interest,  insurance,  and  taxes  actually  paid,  and  from 
that  amount  deduct  the  incidental  income  which  may  have 
been  received  between  the  date  of  purchase  and  the  date  of  the 
incidence  of  the  tax.  The  result  then  shown  will  be  the  cost 
of  the  property  or  the  amount  to  be  excluded  from  the  pro- 
ceeds as  capital  when  the  property  is  sold. 

Depreciation  deduction. — The  Federal  Income  Tax  Law 
specifically  provides  that  in  making  their  returns  of  annual 
net  income  corporations  may  deduct,  among  other  items,  "all 
losses  actually  sustained  within  the  year  and  not  compensated 
by  insurance  or  otherwise,  including  a  reasonable  allowance 
for  depreciation  by  use,  wear  and  tear  of  property,  if  any." 

Under  this  provision  of  the  law  assets  of  any  character 
whatever  which  are  not  affected  by  use,  wear  and  tear,  are 
not  subject  to  the  depreciation  authorized  by  the  act.  Real 
estate  as  such,  and  as  distinct  from  the  improvements  thereon, 
is  not  reduced  in  value  by  reason  of  wear  and  tear,  and  it 
therefore  follows  that  the  "allowance"  contemplated  by  depre- 
ciation in  the  case  of  real  estate  corporations  does  not  apply 
to  the  ground,  but  is  intended  to  measure  the  decline  in  the 
value  of  the  improvements,  which  decline  in  value  is  due  to 
wear  and  tear  of  such  improvements. 

In  determining  the  cost  of  the  real  estate,  in  most  cases  no 
segregation  is  made  of  the  cost  of  buildings  as  separate  and 
distinct  from  the  cost  of  the  grounds  upon  which  such  build- 
ings stand.    In  such  cases,  where  the  actual  cost  of  the  build- 


Treasury  Department  Special  Rulings         281 

ings  or  improvements  at  the  time  they  were  taken  over  by 
the  corporation  cannot  be  definitely  determined,  it  will  be 
sufficient  for  the  purpose  of  determining  the  rate  of  deprecia- 
tion to  be  used  in  computing  the  amount  which  will  be  de- 
ductible from  gross  income  to  estimate  the  actual  value  of  the 
buildings  or  improvements  as  of  January  1,  1909,  provided 
such  buildings  were  in  existence  at  that  time,  and  provided 
that  the  value  placed  upon  such  buildings  shall  not  be  in 
excess  of  the  cost  of  such  buildings,  less  an  amount  measuring 
the  depreciation  which  had  previously  been  sustained. 

Dividends  received  by  corporations. — The  income  received 
by  corporations  on  account  of  dividends  will  be  subject  to  tax 
in  the  hands  of  the  company  paying  the  same,  being  a  part 
of  its  net  earnings,  and  also  in  the  hands  of  the  company 
receiving  the  same. 

The  Federal  Income  Tax  Law  specifically  sets  out  that 
there  shall  be  returned  as  gross  income  all  income  received 
from  all  sources  during  the  year  for  which  the  return  is  made, 
and  it  specifically  enumerates  the  items  which  may  be  allow- 
ably deducted  from  such  gross  income.  There  is  no  provision 
of  the  law  whereby  dividends  received  from  other  corpora- 
tions may  be  excluded  from  gross  income  or  deducted  there- 
from. Each  corporation  is  a  separate  and  distinct  entity  and 
must  return,  for  the  purposes  of  the  tax,  the  income  which 
it  receives  (except  interest  on  obligations  of  a  State  or  its 
political  subdivisions  or  on  the  obligations  of  the  United 
States  or  its  possessions),  regardless  of  the  source  from  which 
such  income  is  received  or  regardless  of  the  fact  that  a  portion 
of  such  income  may  constitute  dividends  from  other  corpora- 
tions subject  to  tax. 

Exempt  corporations. — In  cases  wherein  corporations  have, 
by  affidavit  or  otherwise,  clearly  established  the  fact  and  satis- 
fied collectors  of  internal  revenue  that  they  are  exempt  from 
the  requirements  of  the  Federal  Income  Tax  Law,  or  are 
defunct,  dissolved,  or  obsolete,  and  are  no  longer  carrying  on 
any  business  and  have  no  property  or  income,  returns  will 
not  be  required  of  them  after  such  condition  has  been  clearly 


282  Federal  Income  Tax 

established.  But  one  showing  of  this  character  as  to  each  such 
particular  corporation  will  be  required  unless  it  shall  later 
appear  that  any  such  corporation  shall  have  such  income 
within  the  meaning  of  the  law  as  brings  it  within  its  require- 
ments. 

Expenses  deductible  by  tenant  corporations. — In  the  case 
of  corporations  which  occupy  leased  premises  under  a  lease 
contract  which  requires  such  corporations  to  make  all  neces- 
sary repairs  or  improvements,  which  repairs  or  improvements 
revert  to  the  owner  of  the  fee  at  the  expiration  of  the  lease, 
the  tenant  corporation  is  entitled  to  charge  the  cost  of  all  such 
repairs  and  improvements  to  the  expense  of  doing  business. 
This  expense  of  improvements,  somewhat  permanent  in  char- 
acter, should,  however,  bo  prorated  over  the  number  of  years 
constituting  the  term  of  the  lease,  and  the  amount  deductible 
from  gross  income  of  each  year  would  be  the  aliquot  part  of 
the  cost  of  such  repairs  and  improvements. 

Foreign  corporation  doing  business  by  an  agent. — The 
Federal  Income  Tax  Law  provides  that  the  normal  tax  im- 
posed by  it  shall  be  levied,  assessed,  and  collected  upon  the 
entire  net  income  arising  and  accruing  to  foreign  corporations 
from  business  transacted  or  capital  invested  in  this  country. 
Such  a  corporation  may  transact  business  or  have  capital 
invested  in  this  country  through  and  by  an  agent  as  com- 
pletely as  if  it  were  transacting  the  business  or  investing  the 
capital  direct  from  its  home  office  or  through  a  duly  estab- 
lished branch  office  in  the  United  States.  An  agent  who  is 
doing  business  in  this  country,  buying  and  selling  certain 
products  of  the  foreign  corporation,  is  to  all  intents  and  pur- 
poses a  branch  of  the  foreign  corporation,  as  through  and  by 
him  the  foreign  corporation  is  transacting  business  in  this 
country. 

The  buying  and  selling  of  a  product  in  this  country  through 
a  local  agency  or  branch  for  and  on  behalf  of  a  foreign  cor- 
poration is  clearly  transacting  business  in  this  country  within 
the  meaning  of  the  Federal  Income  Tax  Law,  and  any  net 
income  arising  and  accruing  because  of  the  business  so  trans- 


Treasury  Department  Special  Rulings         283 

acted  will  be  held  to  be  subject  to  the  tax  imposed  by  the 
Federal  Income  Tax  Law,  and  every  foreign  corporation 
carrying  on  business  in  the  manner  indicated  will  be  required 
to  make  a  return  of  annual  net  income  covering  the  business 
so  transacted. 

Fiscal  year  returns  of  new  corporations. — In  the  case  of 
new  corporations,  if  they  shall  file  or  shall  have  filed  within 
the  prescribed  time,  a  notice  designating  the  last  day  of  some 
month  as  the  close  of  the  fiscal  year,  such  corporations  will 
be  permitted  to  make  their  returns  as  of  the  period  ended 
with  the  date  designated,  provided  the  period  intervening 
between  the  date  of  organization  of  the  corporation  and  the 
date  designated  as  the  close  of  its  fiscal  year  does  not  exceed 
12  months.  If  such  period  does  exceed  12  months,  the  corpo- 
ration will  make  a  return  for  the  portion  of  the  calendar  year 
preceding  the  beginning  of  the  fiscal  year,  which  return  must 
be  filed  on  or  before  the  1st  day  of  March  next  following  the 
calendar  year  of  which  it  is  a  part.  Corporations  partially 
organized  during  the  year  1914  should  file  a  return  for  the 
period  ended  December  31,  1914,  unless  they  shall  have  estab- 
lished a  fiscal  year  for  this  purpose,  and  if  they  shall  have 
actually  done  no  business  during  the  period  for  which  the 
return  is  made,  that  fact  will  be  set  out  in  a  notation  on  or  a 
rider  attached  to  the  return. 

Good  will. — Good  will  does  not  represent  a  value  attaching 
to  physical  property,  and  is  held  to  be  an  intangible  asset, 
whose  value  separate  "and  apart  from  the  business  with  which 
it  is  connected  is  not  capable  of  determination.  For  the  pur- 
pose of  the  income  tax,  it  is  capable  of  neither  appreciation 
nor  depreciation.  Hence  an  amount  claimed  to  represent  its 
decline  in  value  is  not  an  allowable  deduction  from  gross 
income  in  computing  the  tax  liability  of  an  individual  or  a 
corporation. 

Gross  value  at  the  mine,  etc. — "Gross  value  at  the  mine," 
as  contemplated  in  that  provision  of  the  Federal  Income  Tax 
Law  which  authorizes  mining  companies  to  deduct  from  gross 
income  an  amount  to  take  care  of  depletion  of  natural  de- 


284  Federal  Income  Tax 

posits,  is  held  to  mean  the  gross  price  at  which  the  product 
could  be  sold  at  the  mine ;  that  is,  its  actual  bona  fide  market 
value. 

The  term  "gross"  as  applied  to  "value"  contemplates  the 
aggregate  value  of  the  product  at  the  mine  determined  upon 
the  basis  of  the  market  conditions  at  the  time  and  place,  and 
is  best  defined  as  the  price  at  which  the  product  sells  or  would 
sell  when  delivered  at  the  mouth  of  the  mine  in  a  marketable 
condition.  Five  per  cent  of  the  value  thus  determined  will 
constitute  the  maximum  amount  which  a  mining  corporation 
may  deduct  under  the  Federal  Income  Tax  Law  from  gross 
income  on  account  of  depletion  of  natural  deposits.  This 
does  not  contemplate  that  the  full  5  per  cent  of  the  gross  value 
will  be  allowed  if  the  aggregate  amount  calculated  at  a  less 
rate  will  equal  the  cost  in  place  of  such  deposits  or  secure  to 
the  corporation  the  return  of  its  capital  when  the  deposits 
have  been  exhausted. 

Indebtedness  secured  by  collateral. — The  instruction  given 
under  item  6  (a)  of  the  supplementary  statement  forming  a 
part  of  the  return  Form  1031  is  in  error,  in  so  far  as  it 
requires  indebtedness  wholly  secured  by  collateral  the  subject 
of  sale  in  the  ordinary  business  of  a  corporation  to  be  included 
in  item  2  of  the  return  proper. 

Indebtedness  to  be  included  under  item  2  of  the  return  is 
all  interest-bearing  indebtedness,  except  that  wholly  secured 
by  collateral  the  subject  of  sale  in  the  ordinary  business  of  the 
corporation. 

Income  from  real  estate  transactions. — Gains  and  profits 
resulting  from  a  real  estate  transaction  are  subject  to  income 
tax  in  so  far  as  they  represent  actual  net  income  for  the  year 
in  which  the  transaction  occurred.  The  amount  of  income 
to  be  returned  for  the  purpose  of  the  income  tax  in  the  case 
of  the  sale  of  capital  assets  is  the  amount  received  upon  the 
sale  of  the  property  in  excess  of  its  original  cost,  provided 
both  the  purchase  and  sale  of  the  property  took  place  since 
January  1,  1909.  If  the  property  was  acquired  prior  to 
January  1,  1909,  the  difference  between  the  cost  price  and  the 


Treasury  Department  Special  Kdlings         285 

selling  price  will  be  considered  income  to  the  corporation, 
which  income  may  be  prorated  according  to  the  number  of 
years  the  property  was  held  prior  to  its  sale,  and  the  amount 
thus  apportioned  to  the  years  subsequent  to  January  1,  1909, 
will  be  returned  as  income  for  the  year  in  which  the  property 
was  sold. 

In  determining  the  amount  of  income  to  be  accounted  for 
on  this  basis  the  corporation  will  consider  mortgages,  mort- 
gage notes,  or  any  other  credits  received  in  payment  of  the 
property  as  though  they  were  cash,  and  if  it  should  occur  that 
the  purchaser  of  any  of  the  property  should  later  default  in 
payment  the  corporation  will  be  entitled  to  take  credit  as  a 
loss  for  the  amount  of  loss  actually  sustained  by  reason  of  the 
default. 

In  determining  the  cost  of  the  property  for  the  purpose  of 
arriving  at  the  profit  realized  upon  the  sale  it  will  be  permis- 
sible for  the  corporation  to  add  to  the  initial  cost  such  carry- 
ing charges  as  interest,  taxes,  insurance,  etc.,  provided  such 
carrying  charges  have  not  been  deducted  from  net  income 
which  the  corporation  may  have  had  and  returned  for  years 
subsequent  to  January  1,  1909,  and  prior  to  the  date  of  the 
sale  of  the  property. 

Itemized  statement  on  Form  1031. — In  the  case  of  public- 
service  and  all  other  corporations  it  is  desired  by  this  office 
that  the  supplementary  statement  which  forms  a  part  of  the 
return  Form  1031,  prescribed  by  the  Secretary  of  the  Treas- 
ury for  the  use  of  such  corporations  in  making  their  returns 
of  annual  net  income,  shall  be  prepared  as  far  as  practicable 
in  detail. 

It  is  not  expected  or  required,  however,  that  every  particu- 
lar item  going  to  make  up  either  gross  income  or  the  deduc- 
tions therefrom  shall  be  set  out  in  the  supplementary  state- 
ment. It  will  be  sufficient  for  the  purpose  of  this  office  in  the 
case  of  public-service  corporations  and  other  similar  concerns 
that  they  supply  the  information  by  classes  rather  than  giving 
the  items  in  detail,  classifying  the  income  and  expenditures  in 


286  Federal  Income  Tax 

the  same  manner  as  is  required  as  to  these  items  by  the  Inter- 
state Commerce  Commission. 

Investment  of  depreciation  fund. — The  investment  of  de- 
preciation reserve  funds  in  the  concern's  own  plant  in  the  way 
of  additions  and  extensions  would  appear  to  be  such  a  diver- 
sion of  the  funds  as  is  contemplated  by  Articles  132  and  133 
of  Eegulations  33  and  T.  D.  1943.     *     *     * 

Investments  in  additions  and  extensions  are  primarily 
capital  investments  and  the  fact  that  the  corporation  is  in- 
vesting its  depreciation  funds  in  additions  and  betterments 
or  improvements  would  seem  to  indicate  that  the  amounts 
set  aside  on  account  of  depreciation  were  in  excess  of  a  reason- 
able allowance  which  the  law  contemplates  a  corporation  may 
deduct  from  its  gross  income,  and  when  it  shall  appear  that 
by  reason  of  the  investing  of  its  depreciation  funds  in  addi- 
tions, betterments  and  improvements,  it  actually  adds  to  the 
value  of  its  capital  assets  it  will  be  insisted  upon  that  the 
amount  by  which  the  assets  are  increased  on  this  account  shall 
be  returned  as  income  and  be  subject  to  the  income  tax. 

Interest-bearing  indebtedness. — The  amount  of  interest- 
bearing  indebtedness  of  a  corporation,  outstanding  at  the  close 
of  the  year,  should  bo  reported  under  item  2  of  the  return 
Form  1031  whether  the  interest  accrued  upon  such  indebted- 
ness was  actually  paid  within  the  year  or  not. 

Items  entering  into  cost  of  manufacture. — The  only  inter- 
est which  constitutes  an  allowable  deduction  from  gross  in- 
come under  the  Federal  Income  Tax  Law  is  the  amount  actu- 
ally paid  within  the  year  on  the  maximum  principal  ascer- 
tained by  adding  to  the  full  amount  of  the  paid-up  capital 
stock  outstanding  at  the  close  of  the  year  one-half  of  the 
interest-bearing  indebtedness  also  then  outstanding  and  such 
interest  as  is  actually  paid  on  indebtedness  wholly  secured  by 
collateral  the  subject  of  sale  in  the  ordinary  business  of  the 
corporation. 

Interest  payments  of  this  character,  being  allowable  deduc- 
tions from  gross  income,  will  not  be  taken  into  account  as  a 
part  of  the  cost  of  manufacture  for  the  reason  that  to  consider 


Treasury  Department  Special  Rulings         287 

them  an  element  of  the  cost  of  manufacture  and  to  deduct 
them  from  gross  income  as  specific  items  would  in  effect  result 
in  a  double  deduction  of  the  amounts  involved. 

A  corporation  would  not  be  permitted  to  include  in  its 
deductions  the  rental  value  of  the  property  which  it  owns  and 
occupies  nor  would  it  be  permitted  to  deduct  from  gross  in- 
come the  interest  which  the  capital  invested  or  employed 
would  earn  were  it  otherwise  invested. 

It  therefore  follows  that  a  corporation  cannot  take  into 
account  as  a  part  of  the  cost  of  manufacture  any  possible 
earnings ;  that  is,  earnings  which  might  accrue  on  its  capital 
or  investment  had  such  capital  been  so  placed  as  to  earn  a 
given  rate  of  interest. 

Liability  of  close  corporation. — A  corporation  formed  as  a 
family  affair  to  hold  property  together  and  not  to  sacrifice  in 
selling  does  not  come  within  the  class  of  corporations  specifi- 
cally enumerated  as  exempt  from  the  requirements  of  the 
Federal  Income  Tax  Law,  and  is  required  to  make  a  return 
of  annual  net  income  showing  therein  all  income  arising  and 
accruing  to  it  from  all  sources  and  to  pay  any  income  tax 
shown  by  such  return  to  be  due. 

Limited  partnerships. — Limited  partnerships,  which  are 
held  to  be  associations  within  the  meaning  of  the  Federal  In- 
come Tax  Law,  will  use  Form  1031  in  making  their  returns 
of  annual  net  income  for  the  year  1914. 

The  profits  of  limited  partnerships  making  returns  in  the 
same  manner  as  corporations  make  returns  will  be  treated  the 
same  as  dividends  of  corporations  and  will  be  returned  in  the 
returns  of  individuals  in  the  same  manner  as  are  dividends 
upon  the  stock  of  corporations ;  that  is  to  say,  the  dividends 
received  from  such  limited  partnerships  will  not  be  subject 
to  the  normal  tax  in  the  hands  of  the  members  of  the  partner- 
ship receiving  the  same. 

Lobbying  expenses. — Sums  of  money  expended  for  lobby- 
ing purposes  and  contributions  for  campaign  expenses  are 
held  not  to  be  an  ordinary  and  necessary  expense  in  the  opera- 
tion and  maintenance  of  the  business  of  a  corporation,  and 


288  Federal  Income  Tax 

are  therefore  not  deductible  from  gross  income  in  arriving 
at  the  net  income  upon  which  the  income  tax  is  computed. 

Publicity  of  supplementary  statements. — The  supplement- 
ary statement  which  is  made  a  part  of  the  return  form  pre- 
scribed for  the  use  of  corporations  in  making  returns  of 
annual  net  income  is  by  express  terms  made  a  part  of  the 
return,  and  to  the  same  extent  that  the  return  constitutes  a 
public  record  and  is  open  to  inspection,  to  that  extent  the 
supplementary  statement  is  also  a  public  record  and  open  to 
inspection  "only  upon  the  order  of  the  President  under  rules 
and  regulations  prescribed  by  the  Secretary  of  the  Treasury 
and  approved  by  the  President." 

Place  of  filing  returns. — In  the  case  of  domestic  corpora- 
tions whose  books  of  account  and  other  data  are  kept  in 
foreign  countries,  the  returns  should  be  made  to  the  collector 
of  internal  revenue  of  the  district  in  which  they  have  branch 
offices  in  this  country,  if  they  have  such  branch  offices.  Other- 
wise, the  returns  of  annual  net  income  of  such  corporations 
should  be  made  to  the  collector  of  the  district  in  which  are 
located  the  statutory  offices  of  the  corporations. 

Private  hanks — Associations. — Private  banks  which  have 
the  form  of  corporate  organizations,  elect  officers  and  a  board 
of  managers,  have  a  distinctive  name,  a  fixed  situs,  and  dis- 
tribute their  net  earnings  upon  the  basis  of  the  amount  of 
capital  invested  by  the  members  or  owners  are  held  to  be 
associations  within  the  meaning  of  the  Federal  Income  Tax 
Law,  and  in  their  organized  capacity  should  make  returns 
of  annual  net  income  and  pay  any  income  tax  thereby  shown 
to  be  due. 

The  holders  of  the  stock  or  the  owners  of  the  bank  will  be 
exempt  from  the  normal  tax  to  the  extent  of  the  dividends  or 
earnings  which  they  receive  from  such  private  banks  as  make 
returns  in  their  organized  capacity  and  pay  income  tax  in 
accordance  therewith.  The  individual  owners  of  the  bank 
will  not  be  required  to  return  as  income  for  the  purpose  of 
the  normal  tax  any  dividends  or  earnings  received  from  the 
private  bank  which  pays  the  tax  on  its  net  earnings,  but  for 


Treasury  Department  Special  Rulings         289 

the  purpose  of  the  supertax  the  dividends  will  be  returned  as 
income  by  the  individual  stockholders  or  owners. 

Private  banks — Individual  ownership. — When  it  can  be 
clearly  shown  that  a  private  bank  is  owned  by  one  man,  it  is 
evident  that  such  bank  is  not  an  association  within  the  mean- 
ing of  the  Federal  Income  Tax  Law,  and  that  therefore  such 
bank  will  not  be  required  to  make  a  return  such  as  corpora- 
tions and  associations  are  required  to  make,  but  the  indi- 
vidual owner,  if  he  has  a  net  income  of  $3,000  or  more,  will 
be  required  to  make  a  return  on  Form  1040,  showing  in  such 
return  the  income  which  he  receives  not  only  from  the  bank 
but  from  all  other  sources. 

Paid-up  capital  stock. — In  making  returns  of  annual  net 
income  for  the  purpose  of  the  income  tax,  every  corporation, 
in  making  such  returns,  must  report  under  item  1  of  the 
return  form  the  total  par  value  of  its  stock,  both  common  and 
preferred,  outstanding  at  the  close  of  the  year. 

Stock  outstanding  at  the  close  of  the  year  and  upon  the 
basis  of  which  dividends  are  or  may  be  paid  is  held  to  be 
paid-up  capital  stock  within  the  meaning  of  the  law.  For 
this  purpose  it  is  immaterial  whether  the  stock  be  paid  for 
in  cash,  promissory  notes,  or  other  assets.  The  fact  that  notes 
are  given  in  payment  of  the  stock  issued  and  that  the  notes 
have  not  been  paid  in  full  at  the  time  the  return  is  made  is 
immaterial. 

Returns  of  holding  companies. — In  a  case  wherein  a  hold- 
ing company  actually  takes  up  each  month  on  its  books  its 
proportionate  share  of  the  earnings  of  the  underlying  com- 
panies, such  holding  company  will  be  required  to  include  in 
its  gross  income  the  amounts  thus  taken  up  regardless  of  the 
fact  that  the  same  may  not  have  been  actually  paid  to  it  in 
cash.  The  fact  that  the  underlying  companies  credit  to  the 
holding  company  the  amount  of  earnings  to  which  it  is  en- 
titled on  the  basis  of  the  stock  it  holds,  together  with  the  fact 
that  the  holding  company  takes  up  on  its  books  the  amount 
thus  credited,  renders  it  incumbent  upon  the  holding  company 
to  return  these  amounts  as  income,  regardless  of  the  fact  that 
19 


290  Federal  Income  Tax 

the  underlying  companies  needed  these  earnings  and  used 
them  in  making  extensions  and  improvements  and  in  further- 
ance of  their  business. 

Expenditures  for  such  extensions  and  improvements  being 
chargeable  to  the  property  account  of  the  subsidiary  com- 
panies are  not  deductible  from  the  gross  income  and  will 
therefore  not  have  the  effect  to  reduce  the  earnings  to  their 
respective  shares  of  which  the  stockholders  are  entitled. 

Returns  of  subsidiary  companies — Where  made. — Under 
the  provisions  of  the  Federal  Income  Tax  Law  and  the  regu- 
lations of  this  department,  every  corporation,  joint-stock  com- 
pany or  association,  and  every  insurance  company,  regardless 
of  its  relation  to  another  corporation,  is  held  to  be  a  separate 
and  distinct  entity,  and  unless  it  comes  within  the  class  of 
organizations  specifically  enumerated  in  the  act  as  exempt 
must  make  a  separate  and  distinct  return,  complete  in  every 
detail. 

If  the  subsidiary  companies  of  any  parent  corporation 
making  a  return  in  any  particular  district  have  their  princi- 
pal places  of  business  in  the  same  district,  such  corporations 
will  be  listed  by  the  collector  of  that  district  on  his  Form  632, 
and  will  be  required  to  make  separate  returns  as  above  indi- 
cated. 

If,  however,  the  subsidiary  companies  keep  separate  books 
of  account  and  have  their  principal  accounting  offices  in  other 
districts,  returns  of  such  corporations  will  be  made  to  the 
collector  of  internal  revenue  of  the  district  in  which  they  have 
such  principal  offices. 

Real  estate  collateral. — The  Federal  Income  Tax  Law  pro- 
vides that  in  case  of  indebtedness  wholly  secured  by  collateral 
the  subject  of  sale  in  the  ordinary  business  of  such  corpora- 
tion, joint-stock  company  or  association,  the  total  interest 
secured  and  paid  by  such  company,  corporation,  or  associa- 
tion within  the  year  on  any  such  indebtedness  may  be  de- 
ducted as  a  part  of  its  expenses  of  doing  business. 

Real  estate  to  constitute  collateral  within  the  meaning  of 
this  clause  of  tho  law  must  be  such  real  estate  as  is  in  fact 


Treasury  Department  Special  Rulings         291 

the  subject  of  sale  in  the  ordinary  business  of  the  corporation. 
If  the  corporation  whose  ordinary  business  is  the  purchase 
and  sale  of  real  estate  has  an  office  building  under  mortgage, 
which  office  building  is  not  subject  to  sale  in  the  ordinary 
business  of  the  corporation,  the  interest  paid  on  such  mort- 
gage will  not  be  deductible  under  item  4  of  the  return  form 
(1031),  but  in  that  case  would  be  deductible  under  item 
6  (a)  of  the  return  form  to  an  amount  not  in  excess  of  the 
limit  fixed  by  the  law  as  set  out  in  said  item. 

Tentative  returns. — In  cases  wherein  foreign  corporations 
or  domestic  corporations  doing  business  in  foreign  countries 
are  unable  to  assemble  their  data  in  time  to  make  their 
returns  of  annual  net  income  within  the  prescribed  time,  it 
will  be  permissible  for  such  corporations  upon  a  showing  of 
this  fact  to  file  with  the  collector  of  internal  revenue  a  tenta- 
tive return  in  which  there  shall  be  approximated,  as  nearly 
as  possible,  the  actual  business  transacted  during  the  year. 

This  tentative  return  will  be  substituted  by  a  true  and 
accurate  return  as  soon  as  the  necessary  data  to  make  such 
true  and  accurate  return  shall  be  available. 

Collectors  of  internal  revenue  are  authorized  to  grant  an 
extension  of  time  not  in  excess  of  30  days  from  the  date  when 
returns  are  due,  such  extension  to  be  granted  only  in  cases 
wherein  the  neglect  to  file  the  return  within  the  prescribed 
time  was  due  to  the  sickness  or  absence  of  an  officer  whose 
signature  to  the  return  was  necessary.  Foreign  corporations 
or  domestic  corporations  doing  business  in  foreign  countries 
cannot  be  granted  an  extension  of  time  merely  for  the  reason 
that  they  are  unable  to  assemble  their  data  to  make  the  return 
within  the  prescribed  time.  In  all  such  cases  liability  to  the 
penalty  of  the  act  can  be  obviated  only  by  filing  a  tentative 
return  as  hereinbefore  indicated. 

Tax  payable  at  source  on  bond  coupons. — Interest  received 
by  a  corporation  on  bonds  by  the  terms  of  which  the  debtor 
corporation  is  required  to  pay  any  tax  which  may  be  assessed 
thereon  must  be  returned  by  the  corporation  receiving  the 
same  as  a  part  of  its  gross  income,  and,  notwithstanding  the 


292  Fedekal  Income  Tax 

fact  that  the  debtor  corporation  may  have  withheld  and  paid 
the  tax  on  such  interest,  the  receiving  corporation  is  not  per- 
mitted to  deduct  from  its  gross  income  the  amount  of  interest 
upon  which  this  tax  may  have  been  paid. 

Tax-free  covenant. — The  contract  between  the  issuing  cor- 
poration and  the  bondholder  whereby  the  bonds  are  guaran- 
teed to  be  tax  free  is  a  contract  in  which  this  office  in  the 
administration  of  the  Federal  Income  Tax  Law  can  have  no 
concern.  Each  corporation  must  account  for,  in  its  return 
of  annual  net  income,  all  income  which  it  receives  from  all 
sources.  Interest  received  by  a  corporation  on  bonds  which 
it  holds,  whether  they  are  guaranteed  to  be  tax  free  or  not, 
must  be  included  in  the  income  of  the  corporation  receiving 
the  same  and  so  accounted  for  in  its  return  of  annual  net 
income.  In  other  words,  the  corporation  receiving  the  in- 
come must  pay  the  tax  upon  the  same,  if  it  have  a  net  income 
subject  to  tax,  and  the  matter  of  complying  with  the  covenant 
of  the  bond  is  a  matter  to  be  adjusted  between  the  debtor  cor- 
poration and  the  bondholder. 

Subsidiary  companies  must  make  returns. — In  the  case  of 
parent  corporations  owning  all  or  practically  all  of  the  stock 
of  subsidiary  companies,  it  is  held  that  both  corporations  are 
separate  and  distinct  entities  and  that  each  must  make  true 
and  accurate  returns,  accounting  for,  in  detail,  their  separate 
gross  income  and  deductions  therefrom,  and  each  such  com- 
pany will  be  required  to  pay  the  income  tax  on  the  net  earn- 
ing shown  by  such  return. 

It  is  not  sufficient  for  the  purpose  of  the  Income  Tax  Law 
that  the  parent  company  shall  report  the  gross  income  of  the 
subsidiaries  and  deduct  from  such  gross  income  the  expenses 
of  such  subsidiaries.  The  net  earnings  of  the  subsidiary  com- 
panies turned  over  to  the  parent  company  are  dividends 
within  the  meaning  of  the  law,  and  as  such  dividends  are  not 
deductible  from  gross  income,  the  parent  company  must  pay 
income  tax  on  its  net  income  notwithstanding  the  fact  that 
the  earnings  out  of  which  the  dividends  were  paid  had  been 
subject  to  tax  as  against  the  subsidiary  companies. 


\ 


Treasury  Department  Special  Rulings         293 

(T.  D.  2152.) 

Synopsis  of  rulings  on  questions  relating  to  the  income  tax  imposed 
by  section  2  of  the  act  of  October  3,  1913. 

The  following  synopsis  of  rulings  on  questions  relating  to 
the  income  tax  imposed  by  section  2  of  the  act  of  October  3, 
1913,  on  individuals,  corporations,  joint-stock  companies, 
associations,  and  insurance  companies  is  published  for  the 
information  of  internal-revenue  officers  and  others  concerned. 
All  rulings  or  parts  of  rulings  heretofore  made  which  are  in 
conflict  herewith  are  hereby  revoked. 

Part  I. — Bulings  in  Relation  to  Personal  Income  Tax. 

Alien,  nonresident,  services  rendered  by  a,  in  a  foreign 
country. — If  the  status  is  that  of  a  nonresident  alien  the  com- 
pensation paid  for  services  rendered  in  a  foreign  country,  in- 
cluding the  per  diem  allowance  for  business  and  travel  ex- 
penses, is  not  subject  to  the  income  tax  imposed  by  section  2 
of  the  act  of  October  3,  1913. 

Annuity. — The  ruling  with  reference  to  annuities  on  page 
2  of  T.  D.  2090  of  December  14,  1914,  is  hereby  amended 
by  omitting  therefrom  the  words,  "When  the  settlement  under 
such  a  contract  is  made  in  more  than  one  payment,  each  pay- 
ment will  be  considered  as  being  composed  of  interest  and  a 
proportionate  part  of  the  principal.  Where  the  entire  an- 
nuity is  composed  of  an  interest  return  upon  the  principal 
sum  paid  therefor,  the  entire  annuity  is  income,"  so  that  the 
ruling  as  amended  will  read  as  follows : 

"Annuity. — The  amount  paid  under  a  life  insurance,  en- 
dowment, or  annuity  contract  is  not  income  when  returned  to 
the  person  making  the  contract,  either  upon  the  maturity  or 
surrender  of  the  contract ;  but  the  amount  by  which  the  sum 
received  exceeds  the  sum  paid  and  coming  into  the  hands  of 
the  person  making  the  contract  and  payment  is  income." 

Executor  or  administrator:  Return  on  Form  10J/.0,  revised, 


294  Federal  Income  Tax 

by. — The  income-tax  law  of  October  3,   1913,  provides  in 
paragraph  E  that — 

The  tax  herein  imposed  upon  annual  gains,  profits,  and  income  not 
falling  under  the  foregoing  and  not  returned  and  paid  by  virtue  of 
the  foregoing  shall  be  assessed  by  personal  return  under  rules  and 
regulations  to  be  prescribed  by  the  Commissioner  of  Internal  Reve- 
nue and  approved  by  the  Secretary  of  the  Treasury. 

It  is  held  that  the  income  tax  due  from  a  deceased  person 
is  a  debt  against  the  estate  in  the  hands  of  his  executor  or 
administrator ;  and  under  the  authority  quoted  it  has  been 
prescribed  by  regulations  that  the  executor  or  administrator 
shall  file  a  return  for  the  decedent  in  order  that  the  amount 
due  the  Government  from  the  decedent's  estate  may  be  deter- 
mined and  paid. 

Income-tax  laws  of  other  countries. — American  citizens, 
whether  residing  at  home  or  abroad,  resident  aliens,  and  non- 
resident aliens  receiving  income  from  property  owned  and 
from  business,  trade,  or  profession  carried  on  within  the 
United  States,  all  of  whom  are  subject  to  the  income-tax  law 
of  October  3,  1913,  are  not  relieved  from  tax  liability  under 
that  act  by  reason  of  the  fact  that  they  are  also  subject  to  the 
income-tax  laws  of  other  countries. 

Scrip. — The  ruling  under  this  heading  on  page  17  of  T.  D. 
2090  of  December  14,  1914,  is  hereby  amended  by  inserting 
after  the  word  "of"  in  line  8,  the  words  "interest  paid  on" 
and  omitting  the  word  "payment"  after  the  word  "scrip"  in 
same  line,  so  that  the  ruling  as  amended  will  read : 

"Scrip. — Scrip  certificates  issued  by  a  corporation  to  its 
stockholders  in  lieu  of  dividends,  such  scrip  certificates  bear- 
ing interest  and  redeemable  at  a  specified  time  not  longer 
than  one  year  from  date  of  issue,  are  not  corporate  obliga- 
tions similar  to  bonds,  mortgages,  or  deeds  of  trust,  and  the 
interest  jtayable  thereon  will  not  be  subject  to  withholding 
except  when  the  amount  thereof  payable  to  an  individual  in  a 
calendar  year  exceeds  $3,000.  Payment  in  scrip  is  held  to  be 
equivalent  to  payment  in  cash,  and  when  the  amount  of  in- 
terest paid  on  such  scrip  to  any  one  individual  in  a  calendar 


Treasury  Department  Special  Rulings         295 

year  is  in  excess  of  $3,000  the  tax  must  be  withheld  and 
accounted  for  in  excess  of  exemption  claimed." 

State,  payment  by,  to  contractor  not  exempt. — An  indi- 
vidual who  enters  into  a  contract  with  a  State,  or  any  politi- 
cal subdivision  thereof,  for  the  construction  of  a  public  high- 
way, is  held  not  to  be  an  officer  or  employee  of  the  said  State 
or  a  political  subdivision  thereof,  and,  therefore,  the  amounts 
received  by  him  from  the  State  or  a  political  subdivision 
thereof,  under  the  terms  of  the  contract,  are  not  exempt  from 
tax  under  the  provisions  of  the  Federal  Income  Tax  Law,  and 
should  be  included  in  any  return  of  annual  net  income  he  may 
be  required  to  render. 

Part  II. — Rulings  in  Relation  to  Corporation  Income  Tax. 

Assessments  against  private  banks  as  associations. — In  the 
case  of  private  banks  which  have  the  form  of  corporations  and 
which  are  held  to  be  associations  within  the  meaning  of  the 
Federal  Income  Tax  Law,  it  is  not  the  purpose  of  this  office 
to  assess  the  income  tax  against  such  banking  associations  and 
then  also  against  the  individual  members  of  the  association. 

Income  which  the  members  of  the  association  receive  from 
the  bank  because  of  their  investments  therein  will  be  con- 
sidered dividends,  and  for  the  purposes  of  the  normal  tax 
these  dividends  will  not  be  required  to  be  returned  by  the 
individual  members  receiving  them,  but  if  any  individual 
member  of  the  association  have  an  income,  including  the  divi- 
dends, of  more  than  $20,000,  the  dividends  in  that  case  must 
be  returned  as  income  for  the  purposes  of  the  additional  or 
supertax. 

Bank  guaranty  fund. — Banking  corporations,  which,  pur- 
suant to  the  laws  of  the  States  in  which  they  are  doing  busi- 
ness, are  required  to  set  apart,  keep,  and  maintain  in  their 
banks  the  amount  levied  and  assessed  against  them  by  the 
State  authorities  as  a  "Depositors'  guaranty  fund,"  may  de- 
duct from  their  gross  income  in  their  returns  of  annual  net 
income  the  amount  so  set  apart  each  year  to.  this  fund,  pro- 
vided that  such  fund  is  set  aside  and  carried  to  the  credit  of 


296  Fedekal  Income  Tax 

the  State  banking  board,  or  other  duly  authorized  State  offi- 
cer, and  may  be  withdrawn  upon  demand  by  such  board  or 
State  officer  to  meet  the  demands  of  these  officials  in  reim- 
bursing depositors  in  insolvent  banks,  and  provided  further 
that  no  portion  of  the  amount  thus  set  aside  and  credited  is 
returnable  under  the  existing  laws  of  the  State  to  the  assets 
of  the  banking  corporation. 

In  such  eases  the  amount  of  the  guaranty  fund  thus  levied 
against  the  banking  corporation  and  so  set  apart,  kept  and 
maintained  is  no  longer  an  asset  of  the  bank,  but  is  in  the 
nature  of  a  tax  "imposed  by  authority  of  the  State,"  and  as 
such  is  deductible  from  the  gross  income  of  the  banking  cor- 
poration. 

The  first  paragraph  on  page  19  of  T.  D.  2090,  issued  De- 
cember 14,  1914,  which  paragraph  bears  the  title  "Bank 
Guaranty  Fund,''  being  in  conflict  with  the  above  ruling,  is 
hereby  rescinded. 

Bank  taxes  deductible. — The  ruling  of  this  office  previously 
made  to  the  effect  that  banking  corporations  are  not  permitted 
to  deduct  from  gross  income  the  amount  of  taxes  paid  for 
stockholders  on  the  value  of  their  capital  stock  outstanding 
applies  only  to  the  taxes  levied  upon  the  value  of  the  capital 
stock  and  is  not  intended  to  operate  so  as  to  prevent  banking 
corporations  from  deducting  from  their  gross  income  any 
State  tax  imposed  against  the  corporation  itself,  as  an  excise 
or  franchise  tax;  that  is,  a  tax  which  the  corporation  is  re- 
quired to  pay  to  the  State  in  order  that  it  may  transact  busi- 
ness within  the  State. 

Corporations  liable  to  make  returns. — The  tax  imposed  by 
the  Federal  Income  Tax  Law  is  not  imposed  only  upon  such 
corporations  as  are  organized  and  operated  for  pirofit.  Any 
corporation,  joint-stock  company,  or  association,  and  any  in- 
surance company,  no  matter  how  created  or  organized  or  what 
the  purposes  of  its  organization  may  be,  unless  it  comes  within 
the  class  of  organizations  specifically  enumerated  in  the  act 
as  exempt,  will  be  required  to  make  returns  of  annual  net 


Treasuey  Department  Special  Rulings         297 

income  and  pay  income  tax  upon  the  net  income  which  arises 
and  accrues  to  it  during-  the  year. 

A  corporation  is  not  exempt  simply  and  only  because  it  is 
primarily  not  organized  and  operated  for  profit.  If  income 
within  the  meaning  of  the  law  arises  and  accrues  to  a  corpora- 
tion which  is  not  organized  and  operated  for  profit,  such 
income  will  be  subject  to  the  tax  imposed  by  this  act. 

It  is  therefore  held  that  commercial  men's  associations, 
farmers'  mutual  fire  insurance  companies,  and  like  organiza- 
tions come  within  the  requirements  of  the  law. 

Corporations  not  completely  organized. — Corporations 
which  have  applied  for  and  never  received  charters,  or  cor- 
porations which  have  received  charters  and  never  perfected 
their  organizations,  transacted  no  business  and  had  no  income 
whatever  from  any  source,  may,  upon  presentation  of  these 
facts  to  the  collector  of  internal  revenue,  be  relieved  from  the 
necessity  of  making  returns  of  annual  net  income  so  long  as 
they  remain  in  this  unorganized  condition. 

Cost  of  manufactured  products. — A  manufacturing  cor- 
poration may  include  as  an  element  of  the  cost  of  manufac- 
tured products  the  cost  of  the  raw  material,  the  cost  of  labor 
of  the  men  who  actually  work  on  such  products,  as  well  as  the 
cost  of  supervisory,  or  what  may  be  denominated  as  "unpro- 
ductive" labor,  such  as  that  of  the  foremen,  inspectors,  over- 
seers, etc.,  provided  such  expenditures  are  not  separately 
deducted  from  gross  income  in  the  return  of  annual  net 
income. 

The  overhead  charges  referred  to  in  Form  1031  should 
include  the  salaries  of  officers,  clerk  hire,  and  such  other  office 
expenses  as  do  not  have  to  do  directly  with  the  manufacture 
of  the  product. 

Fixed  salaries  and  commissions. — In  cases  wherein  em- 
ployees or  officers  of  a  corporation  are  paid  a  stated  salary  to 
which  is  added  a  certain  percentage  of  the  net  profits  of  the 
corporation  as  compensation  for  services  rendered,  such  cor- 
poration will  be  required  to  report  under  item  4  (a)  7  of 
Form  1030  or  1031  the  amount  of  such  combined  payments 


298  Fedeeal  Income  Tax 

made  to  such  individuals  during  the  year,  provided  the  com- 
hined  amount  is  $3,000  or  more. 

Irrigation  bonds,  district. — District  irrigation  bonds  as  a 
rule,  if  not  always,  are  a  lien  upon  the  real  estate  affected  by 
the  irrigation  project,  and  until  the  corporation  has  taken 
such  steps  as  are  necessary  to  protect  its  rights  and  enforce 
the  collection  of  the  bonds,  it  does  not  appear  that  the  corpora- 
tion would  be  warranted  in  writing  out  of  its  assets  and 
deducting  from  income,  as  a  loss,  the  face  value  or  any  other 
arbitrarily  ascertained  amount  representing  a  loss  or  shrink- 
age in  the  value  of  such  bonds. 

No  fixed  rating  for  depreciation. — This  office  has  fixed  no 
definite  rates  by  which  an  allowable  deduction  on  account  of 
depreciation  in  the  value  of  any  class  of  property  subject 
to  wear  and  tear  is  to  be  computed. 

The  rule  which  this  office  has  established  and  which  is  very 
generally  followed  by  corporations  contemplates  that  an  allow- 
able depreciation  deduction  within  the  meaning  of  the  Fed- 
eral income  tax  law  shall  be  computed  upon  the  basis  of  the 
cost  of  the  property  and  the  probable  number  of  years  con- 
stituting its  life. 

The  life  of  property  necessarily  depends  upon  its  character, 
tbe  uses  to  which  it  is  put,  and  the  conditions  under  which  it 
is  used.  These  elements  being  taken  into  consideration,  cor- 
porations should,  as  a  result  of  experience  and  observation, 
very  closely  approximate  the  number  of  years  constituting  the 
life  of  the  property  and  upon  this  basis  determine  the  rate 
of  depreciation  which  annually  occurs. 

Royalties  subject  to  income  tax. — In  the  case  of  mines 
operated  by  a  lessee  on  a  royalty  basis  it  is  held  that  the  lessor 
in  disposing  of  his  ores  or  natural  deposits  on  the  basis  of 
royalties  has  a  measure  of  profit  in  every  ton  of  ore  disposed  of 
in  this  way,  and  that  so  much  of  the  gross  receipts  on  account 
of  royalties  as  is  in  excess  of  depletion,  not  exceeding  5  per 
cent  of  the  gross  value  of  the  output  at  the  mine,  plus  any 
incidental  expenses  to  which  the  corporation  may  be  subject, 
is  income  within  the  meaning  of  the  Federal  income  tax  law 
and  should  be  so  returned  bv  the  lessor. 


Treasury  Department  Special  Rulings         299 

Salaries  paid  officers  and  employees. — In  the  case  of  sala- 
ries paid  to  officers  and  employees  of  corporations,  this  office 
has  fixed  no  definite  amounts  which  may  be  allowably  de- 
ducted from  gross  income.  Any  amount  representing  a  fair 
and  reasonable  compensation  for  the  services  rendered  by  the 
officers  or  employees,  if  actually  paid,  will  constitute  an  allow- 
able deduction  from  gross  income.  The  salaries  which  consti- 
tute such  allowable  deductions  should  not  depend  upon  the 
profits  of  the  corporation,  but  should,  as  indicated,  be  a  fair 
measure  of  compensation  for  services  rendered,  and  upon  this 
basis  should  not  vary  accordingly  as  the  net  income  or  profits 
of  the  corporation  may  vary  from  year  to  year. 

Shrinkage  in  value  of  securities. — Bonds  and  securities  are 
not  subject  to  wear  and  tear  within  the  meaning  of  the  Fed- 
eral income  tax  law,  and  therefore  depreciation  does  not  apply 
to  any  shrinkage  in  their  value.  Shrinkage  in  the  value  of 
securities  as  such  does  not  constitute  a  loss  actually  sustained 
within  the  year,  the  amount  of  which  is  definitely  ascertained. 
Therefore,  under  the  rules  of  this  office  and  consistent  with 
the  provisions  of  the  law,  a  shrinkage  in  the  value  of  bonds 
or  like  securities  does  not  constitute  an  allowable  deduction 
from  gross  income  either  as  loss  or  depreciation. 

The  fact  that  bonds  and  similar  securities  were  written  off 
at  the  direction  of  the  Comptroller  of  the  Currency  or  the 
State  banking  department  is  not  material.  A  mere  book 
entry  does  not  constitute  either  a  loss  or  gain  for  the  purpose 
of  the  income  tax.  The  fact  that  bonds  were  written  off  does 
not  necessarily  imply  that  they  are  a  total  loss,  nor  is  this 
act  a  conclusive  proof  that  any  loss  occurred  during  the  year 
for  which  the  return  is  made. 

Losses  of  this  character  are  only  ascertainable  when  the 
securities  mature,  are  disposed  of,  or  canceled. 

.  Special  compensation  not  deductible. — Special  payments 
made  by  a  corporation  as  extra  compensation  to  certain  of  its 
employees  may  be  deducted  from  gross  income,  if  it  is  clearly 
shown  that  such  payments  are  made  as  compensation  for  serv- 
ices rendered  and  are  paid  in  pursuance  of  a  contract  ex- 
pressed or  implied. 


300  Federal  Ixcome  Tax 

If  such  so-called  "compensation"  is  a  gratuity  or  voluntary 
payment,  for  which  no  service  is  rendered,  the  amounts  so 
paid  are  not  deductible.  In  cases  wherein  the  payments  are 
made  as  compensation  for  services  rendered,  the  employee 
receiving  the  same,  if  he  be  a  "taxable  person,"  will  be  re- 
quired to  include  the  amount  of  such  compensation  in  his 
personal  income  tax  return. 


(T.  D.  2153.) 

Income  from  farm  products  and  crop-share  rentals  to  be  included  in 
the  return  of  income  for  the  year  in  which  sold  or  exchanged  for 
money  or  a  money  equivalent. 

The  tercn  "farm"  as  herein  used  embraces  the  farm  in  the 
ordinarily  accepted  sense,  plantations,  ranches,  stock  farms, 
dairy  farms,  poultry  farms,  fruit  farms,  truck  farms,  and  all 
lands  used  for  similar  purposes ;  and  for  the  purposes  of  this 
decision  all  persons  who  cultivate,  operate,  or  manage  farms 
for  gain  or  profit,  either  as  owners  or  tenants,  are  designated 
as  "farmers." 

All  gains,  profits,  and  income  derived  from  the  sale  or  ex- 
change of  farm  products,  whether  produced  on  the  farm  or 
purchased  and  resold  by  a  farmer,  shall  be  included  in  the 
return  of  income  for  the  year  in  which  the  products  were 
actually  marketed  and  sold ;  and  all  allowable  deductions,  in- 
chiding  the  legitimate  expenses  incident  to  the  production 
of  that  year  or  future  years,  may  be  claimed  in  the  return 
of  income  for  the  tax  year  in  which  the  right  to  such  deduc- 
tions shall  arise,  although  the  products  to  which  such  expenses 
and  deductions  are  incidental  may  not  have  been  sold  or  ex- 
changed for  money,  or  a  money  equivalent,  during  the  year 
for  which  the  return  is  rendered. 

Rents  received  in  crop  shares  shall  likewise  be  returned 
as  of  the  year  in  which  the  crop  shares  are  reduced  to  money 
or  a  money  equivalent,  and  allowable  deductions,  likewise, 
shall  be  claimed  in  the  return  of  income  for  the  tax  year  to 


Treasury  Department  Special  Rulings         301 

which  they  apply,  although  expenses  and  deductions  may  be 
incident  to  products  which  remained  unsold  at  the  end  of  the 
year  for  which  the  deductions  are  claimed.  When  farm  prod- 
ucts are  held  for  favorable  market  prices,  no  deduction  on 
account  of  shrinkage  in  weight  or  physical  value,  or  losses  by 
reason  of  such  shrinkage  or  deterioration  in  storage,  shall  be 
allowed. 

Cost  of  stock  purchased  for  resale  is  an  allowable  deduction 
under  the  item  of  expense,  but  money  expended  for  stock  for 
breeding  purposes  is  regarded  as  capital  invested,  and 
amounts  so  expended  do  not  constitute  allowable  deductions 
except  as  hereinafter  stated. 

Where  stock  has  been  purchased  for  any  purpose,  and 
afterwards  dies  from  disease  or  injury,  or  is  killed  by  order 
of  the  authorities  of  a  State  or  the  United  States,  and  the 
cost  thereof  has  not  been  claimed  as  an  item  of  expense,  the 
actual  purchase  price  of  such  stock,  less  any  depreciation 
which  may  have  been  previously  claimed,  may  be  deducted 
as  a  loss.  Property  destroyed  by  order  of  the  authorities  of 
a  State  or  of  the  United  States  may,  in  like  manner,  be 
claimed  as  a  loss;  but  if  reimbursement  is  made  by  a  State 
or  the  United  States,  in  whole  or  in  part,  on  account  of  stock 
killed  or  property  destroyed,  the  amount  received  shall  be 
reported  as  income  for  the  year  in  which  reimbursement  is 
made. 

The  cost  of  farm  machinery  is  not  an  allowable  deduction 
as  an  item  of  expense,  but  the  cost  of  ordinary  tools  may  be 
included  under  this  item. 

Under  the  sixth  deduction  enumerated  in  paragraph  B, 
providing  for  "a  reasonable  allowance  for  the  exhaustion, 
wear  and  tear  of  property  arising  out  of  its  use  or  employ- 
ment *  *  *,"  there  may  be  claimed  a  reasonable  allowance 
for  depreciation  on  farm  buildings  (other  than  a  dwelling- 
occupied  by  the  owner),  farm  machinery,  and  other  physical 
property,  including  stock  purchased  for  breeding  purposes ; 
but  no  claim  for  depreciation  on  stock  raised  or  purchased 
for  resale  will  be  allowed. 


302  Federal  Income  Tax 

Farmers  who  keep  books  according  to  some  approved 
method  of  accounting,  which  clearly  show  the  net  income, 
may  prepare  their  returns  from  such  books,  although  the 
method  of  accounting  may  not  be  strictly  in  accordance  with 
the  provisions  of  this  decision. 

A  person  cultivating  or  operating  a  farm  for  recreation  or 
pleasure,  on  a  basis  other  than  the  recognized  principles  of 
commercial  farming,  the  result  of  which  is  a  continual  loss 
from  year  to  year,  is  not  regarded  as  a  farmer.  In  such 
cases,  if  the  expenses  incurred  in  connection  with  the  farm 
are  in  excess  of  the  receipts  therefrom,  the  entire  receipts 
from  sale  of  products  may  be  ignored  in  rendering  a  return 
of  income,  and  the  expenses  incurred,  being  regarded  as  per- 
sonal expenses,  will  not  constitute  allowable  deductions  in  the 
return  of  income  derived  from  other  sources. 


(T.  D.  2161.) 

Synopsis  of  rulings  on  questions  relating  to  the  income  tax  imposed 
by  section  2  of  the  act  of  October  3,  1913. 

The  following  synopsis  of  rulings  on  questions  relating  to 
the  income  tax  imposed  by  section  2  of  the  act  of  October  3, 
1913,  on  individuals,  corporations,  joint-stock  companies,  as- 
sociations, and  insurance  companies  is  published  for  the  in- 
formation of  internal  revenue  officers  and  others  concerned. 
All  rulings  or  parts  of  rulings  heretofore  made  which  are  in 
conflict  herewith  are  hereby  revoked. 

Part  II. — Rulings  in  Relation  to  Corporation  Income  Tax. 

Amortization  of  bonds — Amending  Article  135,  Regula- 
tions No.  33. — That  part  of  Article  135  of  Eegulations  No. 
33,  relative  to  the  amortization  of  bonds,  which  ends  with  the 
words  "become  due  and  payable,"  has  been  entirely  rescinded 
and  superseded  by  T.  D.  2005  and  T.  D.  2130.  The  remain- 
ing portion  of  Article  135,  beginning  with  the  words  "with 


Treasury  Department  Special  Rulings         303 

respect  to  bond  issues,"  remains  in  full  force  and  effect  and 
refers  entirely  to  the  treatment  of  bonds  discounted  in  cases 
wherein  corporations  sell  their  bonds  at  a  discount.  The  in- 
tention of  this  part  of  the  article  is  to  allow  corporations  sell- 
ing their  own  bonds  at  a  discount  to  prorate  the  discount  over 
the  life  of  the  bonds  and  to  deduct  from  gross  income  each 
year  an  aliquot  part  of  the  discount  determined  in  accordance 
with  the  number  of  years  which  the  bonds  have  to  run  from 
the  date  of  issue. 

This  clause  is  not  to  be  considered,  however,  as  permitting 
corporations  which  had  sold  bonds  issued  prior  to  1909  at  a 
discount,  and  had  at  that  time  charged  the  entire  amount  of 
the  discount  into  profit  and  loss,  to  take  up  such  discount  and 
prorate  it  over  the  life  of  the  bonds  for  the  purpose  of  de- 
ducting an  aliquot  part  of  such  discount  from  the  income  of 
current  years  and  thus  reduce  the  taxable  income. 

Banks  deducting  capital  stock  tax  to  make  amended  re- 
turns.— The  capital  stock  outstanding  of  a  banking  corpora- 
tion is  the  personal  property  of  the  individual  stockholder. 
Hence  any  tax  paid  on  the  value  of  this  property  is  a  liability 
of  the  owner,  and  the  requirement  of  a  State  law  that  a  bank 
shall  pay  the  tax  for  the  stockholder  can  not  be  considered  as 
authority  under  which  the  bank  may  deduct  from  its  gross 
income  the  taxes  so  paid. 

If  banking  corporations  in  their  returns  of  annual  net  in- 
come for  the  year  1913  or  prior  years  actually  deducted 
from  gross  income  the  amount  of  tax  paid  upon  the  value  of 
the  capital  stock  outstanding  and  in  the  hands  of  the  stock- 
holders, such  corporations  are  required  to  file  amended  re- 
turns in  which  the  amount  of  such  tax  so  paid  shall  be  elim- 
inated from  the  deductions,  and  additional  assessments  will 
be  returned  accordingly. 

Capital  assets,  value  of;  ivhen. — In  cases  wherein  property 
was  taken  over  in  exchange  for  the  capital  stock  of  a  corpo- 
ration at  a  par  value  greatly  in  excess  of  the  true  value  of 
the  property,  and  such  property  should  be  later  sold,  it  will 
be  necessary  to  ascertain  as  nearly  as  possible  the  true  value 


304  Federal  Income  Tax 

of  the  property  at  the  time  it  was  taken  over,  and  any  excess 
over  this  ascertained  true  value  at  which  the  property  is  sold 
will  be  held  to  be  profit  or  income  to  the  corporation. 

Similar  action  may  bo  taken  in  cases  wherein  corporations 
acquire  property  for  a  mere  nominal  sum  and  which  had  at 
the  time  of  its  acquirement  a  value  greatly  in  excess  of  such 
sum.  A  careful  estimate  of  the  value  of  such  property  at  the 
time  it  was  acquired  may  be  fixed  and  set  up  as  the  value 
representing  the  cost  of  the  property,  and  any  excess  over 
such  fixed  value  at  which  such  property  may  be  thereafter 
disposed  of  will  be  treated  as  income  to  be  accounted  for  in 
accordance  with  the  rules  of  this  department  in  the  case  of 
the  sale  of  capital  assets.  The  value  of  the  property  fixed  in 
the  manner  and  for  the  purpose  hereinbefore  indicated  will 
be  subject  to  the  approval  of  the  Internal  Revenue  Bureau. 

Error  in  T.  D.  2130. — In  the  first  two  lines  of  the  third 
paragraph  of  T.  D.  2130  the  words  "for  the  years  1909  to 
1913,  inclusive,"  should  read  "for  the  years  1909  to  1912, 
inclusive." 

Foreign  corporations  subject  to  income  tax. — In  the  case 
of  foreign  corporations,  section  2,  act  of  October  3,  1913, 
provides  that — 

The  normal  tax  hereinbefore  imposed  shall  be  levied,  assessed,  and 
paid  annually  upon  the  entire  net  income  accruing  from  business 
transacted  and  capital  invested  within  the  United  States. 

When  a  foreign  corporation  sends  a  representative  to  this 
country  to  solicit  business,  the  merchandise  thus  sold  to  be 
shipped  direct  to  the  consignee,  it  will  be  held  that  such  cor- 
poration is  transacting  business  in  this  country.  The  fact 
that  the  solicitor  or  representative  has  only  a  mailing  ad- 
dress in  this  country  is  immaterial:  he  is  none  the  less  an 
agent  of  the  foreign  corporation.  To  the  extent  that  he  sells 
in  this  country  goods  or  merchandise  for  the  foreign  corpo- 
ration, to  that  extent  the  foreign  corporation  is  transacting 
business  in  the  United  States,  and  the  net  income  arising 
and  accruing  to  the  corporation  by  reason  of  the  business  so 


Treasury  Department  Special  Rulings         305 

transacted  will  be  subject  to  the  income  tax  imposed  by  sec- 
tion 2,  act  of  October  3,  1913. 

Any  foreign  corporation  transacting  business  in  this  coun- 
try in  the  manner  hereinbefore  indicated  will  make  a  return 
of  annual  net  income  to  the  collector  of  the  district  in  which 
its  representative  has  bis  mailing  address,  showing  in  such 
return  the  net  income  accruing  to  it  from  the  business  so 
transacted. 

Income  from  tax-free  bonds  returnable. — The  Federal  in- 
come tax  law  specifically  provides  that  corporations  subject  to 
the  law  must  return,  for  the  purpose  of  the  tax,  all  income 
which  they  receive  from  every  source,  the  only  exception 
being  income  received  on  account  of  interest,  on  the  obliga- 
tions of  a  State  or  its  political  subdivisions  or  the  obligations 
of  the  United  States  or  its  possessions. 

The  act  also  specifically  enumerates  the  items  which  they 
may  allowably  deduct  from  the  gross  income  so  returned. 
Under  the  provisions  of  this  act  corporations  must  return 
as  income  the  full  amount  of  the  interest  received  on  bonds, 
although  such  bonds  may  contain  a  tax-free  covenant — that 
is,  a  covenant  in  which  the  debtor  corporation  agrees  to  pay 
any  tax  assessed  upon  the  bonds  or  income  therefrom — and 
since  there  is  no  specific  provision  in  the  law  for  excluding 
or  deducting  from  gross  income  interest  upon  bonds  of  this 
character,  the  receiving  corporation  can  not  allowably  omit  or 
deduct  such  interest  from  its  gross  income,  and  the  same 
will  necessarily  be  reflected  in  the  net  income  upon  which 
the  tax  is  computed. 

Income  of  contracting  companies. — As  this  office  requires 
no  special  system  of  bookkeeping,  neither  does  it  require  any 
specific  method  by  which  the  net  income  to  be  returned  by 
corporations  shall  be  determined. 

In  the  case  of  a  large  contracting  company,  which  has 

numerous  uncompleted  contracts  which  probably,   in  some 

cases,  rim  for  periods  of  several  years,  there  does  not  appear 

to  be  any  objection  to  such  corporation  preparing  its  return 

20 


306  Federal  Income  Tax 

in  such  manner  that  its  gross  income  will  be  arrived  at  on 
the  basis  of  completed  work — that  is  to  say,  on  jobs  which 
have  been  finally  completed  and  payments  made  during  the 
year  in  which  the  return  is  made.  If  the  gross  income  is 
arrived  at  in  this  method,  the  deductions  from  gross  income 
should  be  limited  to  the  expenditures  made  on  account  of 
such  completed  coutracts. 

Mutual  insurance  companies  subject  to  tax. — The  Federal 
income  tax  law  provides — 

That  mutual  fire  insurance  companies  requiring  their  members  to 
make  premium  deposits  to  provide  for  losses  and  expenses  shall  not 
return  as  income  any  portion  of  the  premium  deposits  returned  to 
their  policyholders,  but  shall  return  as  taxable  income  all  income 
received  by  them  from  all  other  sources  plus  such  portion  of  the 
premium  deposits  as  are  retained  by  the  company  for  purposes  other 
than  the  payment  of  losses  and  expenses  and  reinsurance  reserves. 

It  would  appear  from  this  provision  of  the  law  that  all 
assessments  received  by  a  mutual  fire  insurance  company 
and  not  returned  to  the  policyholders,  but  retained  for  pur- 
poses other  than  paying  losses  and  expenses  incurred  during 
the  year  for  which  the  return  is  made  and  for  such  reinsur- 
ance reserves  as  the  laws  of  the  State  require,  are  taxable 
income. 

Therefore,  if  mutual  fire  insurance  companies  retain  out 
of  moneys  received  on  account  of  assessments  an  amount  in 
excess  of  the  losses,  expenses,  and  reinsurance  reserves  of 
any  particular  year,  that  excess,  plus  amounts  received  from 
interest,  dividends,  or  any  other  source,  will  be  considered 
net  income,  upon  which  the  tax  will  be  assessed. 

The  above  quoted  provision  of  the  law  as  construed  by 
this  office  applies  to  all  mutual  fire  insurance  companies,  re- 
gardless of  the  fact  that  some  of  them  may  not  be  primarily 
organized  for  profit. 

Offers  in  compromise  not  acceptable,  when. — In  cases 
wherein  corporations  submit  offers  in  compromise  in  lieu 
of  the  specific  penalty  imposed  by  section  38,  act  of  August 


Treasury  Department  Special  Rulings         307 

5,  1909,  or  section  2,  act  of  October  3,  1913,  it  is  a  condition 
precedent  to  the  adjustment  of  the  matter  involved  that  the 
returns  of  the  corporations  for  the  year  with  respect  to  which 
the  corporations  are  delinquent  shall  be  filed. 

Offers  in  compromise  are  acceptable  only  iu  cases  where 
the  corporations  were  delinquent  in  the  matter  of  filing  their 
returns  and  can  not  be  considered  as  sufficiently  satisfying 
the  requirements  of  the  law  in  cases  wherein  corporations 
fail  or  refuse  to  file  any  returns  whatever. 

Delinquency  applies  to  the  neglect  of  a  corporation  to  file 
its  return  within  the  time  prescribed  by  law  and  does  not 
apply  to  the  failure  of  a  corporation  to  make  a  return  at  any 
time. 

Therefore  if  returns  are  not  filed,  action  looking  to  the 
enforcement  of  the  specific  penalty  against  corporations  fail- 
ing to  file  returns  will  be  taken. 

Sinking  fund  increment  taxable  income. — In  cases  wherein 
corporations  set  aside  and  place  in  a  sinking  fund  under  the 
control  of  trustees  their  own  bonds  or  the  bonds  of  other  cor- 
porations which  they  may  own,  it  is  held  that  the  fund  thus 
set  aside  by  the  corporation  is  an  asset  of  the  corporation, 
and  any  increment  to  that  fund  as  a  result  of  investments 
made  by  the  trustees  having  the  same  in  charge  is  income 
to  tho  corporation  and  should  be  so  included  and  accounted 
for  in  its  returns  of  annual  net  income. 

If  the  trustees  have  invested  the  amount  of  the  sinking 
fund  reserve  or  any  portion  of  it  in  the  bonds  of  the  corpora- 
tion and  such  corporation  pays  to  the  trustees  the  interest 
on  these  bonds,  such  corporation  will  be  permitted  to  deduct 
such  interest  from  its  gross  income,  provided  the  amount  of 
the  interest  thus  paid,  plus  the  interest  on  any  other  out- 
standing indebtedness  which  it  may  have,  does  not  exceed 
the  limit  fixed  by  the  law,  and  provided  further  that  the 
interest  paid  to  the  trustees,  together  with  all  other  earnings 
on  investments  of  the  sinking  fund  made  by  the  trustees,  is 
included  in  the  income  of  the  corporation. 


308  Federal  Income  Tax 

Subsidiaries  to  make  returns,  when. — The  fact  that  a  cor- 
poration maintains  a  number  of  subsidiary  corporations  for 
the  purpose  of  protecting  brands,  trade-marks,  and  trade 
names  is  immaterial.  The  liability  to  make'  returns  attaches 
to  each  subsidiary  company  by  reason  of  the  fact  that  it  is  a 
separate  and  distinct  entity. 

If  such  subsidiary  companies  actually  have  no  net  income 
or  earnings  and  no  expenses  of  operation,  and  the  earnings 
accrue  direct  to  the  parent  company,  which  company  also 
pays  direct  the  operating  expenses  of  the  subsidiaries,  that 
fact  must  be  clearly  set  out  in  the  returns  of  the  subsidiaries. 

In  any  event,  subsidiary  corporations  can  not  escape  lia- 
bility to  make  returns. 

If,  however,  the  subsidiary  concerns  are  mere  partnerships 
or  branches  of  the  parent  company,  and  not  incorporated 
organizations,  then  these  subsidiary  concerns  will  not  be  re- 
quired to  make  returns  of  annual  net  income,  but  all  of  their 
earnings  and  expenses  will  be  taken  up  and  accounted  for  in 
the  return  of  the  parent  company  or  corporation. 


(T.  D.  2162.) 

Nontaxability  of  interest  from  bonds  and  dividends  on  stock  of 
domestic  corporations  owned  by  nonresident  aliens. 

Interest  from  bonds  and  dividends  on  stock  of  domestic 
corporations  owned  by  nonresident  aliens  are  not  subject  to 
the  income  tax,  whether  such  bonds  or  stock  are  physically 
located  within  or  without  the  United  States  or  whether  they 
are  in  the  possession  of  agents  or  trustees  in  some  fiduciary 
capacity  in  the  United  States  or  otherwise. 

All  rulings  and  decisions  in  conflict  herewith  are  hereby 
superseded  and  overruled. 


Treasury  Department  Special  Rulings         309 


(T.  D.  2163— See  T.  D.  2274.) 

Revision  of  T.  D.  2048  defining  taxable  status  of  dividends  paid  on 
the  capital  stock  from  the  current  net  earnings  or  established 
surplus  created  from  the  net  earnings  of  corporations,  joint- 
stock  companies  or  associations,  and  insurance  companies  tax- 
able upon  their  net  income. 

Cash  dividends  or  their  equivalent  paid  from  the  net  earn- 
ings or  the  established  surplus  or  undivided  profits  of  corpora- 
tions, joint-stock  companies  or  associations,  and  insurance 
companies,  if  declared  and  paid  on  or  after  March  1,  1913, 
constitute  taxable  income  in  the  hands  of  shareholders  or 
beneficiaries  when  received,  and  should  be  returned  when 
the  total  net  income  of  any  individual  is  in  excess  of  $20,000, 
inclusive  of  such  dividends,  and  the  additional  tax  should  be 
paid  thereon  as  on  income  for  the  year  in  which  such  divi- 
dends were  received,  without  regard  to  the  period  in  which 
the  profits  or  surplus  were  earned  or  the  period  during  which 
they  were  carried  as  surplus  or  undivided  profits  in  the 
treasury  or  on  the  books  of  the  corporations,  etc. 

Stock  dividends  issued  as  a  bona  fide  and  permanent  in- 
crease of  the  capital  stock  of  corporations,  etc.,  without  intent 
to  evade  the  imposition  of  the  personal  income  tax,  are  held 
to  represent  capital,  and  are  not,  therefore,  subject  to  the 
income  tax  as  gains,  profits,  and  income  in  the  hands  of  the 
stockholder. 

If,  however,  the  dividend  stock  should  be  surrendered  to 
the  corporation  for  cash  or  its  equivalent,  or  if  the  assets 
of  the  corporation  in  any  manner  should  be  distributed  by 
means  of  the  stock  dividend,  the  amount  realized  will  be  con- 
sidered income  for  the  year  when  so  converted  or  received, 
and  will  be  returned  as  income  by  the  corporation  or  indi- 
vidual receiving  the  same. 

T.  D.  2048  of  November  12,  1914,  is  hereby  revised,  and 
all  rulings  or  parts  of  ruling's  heretofore  made  which  are  in 
conflict  herewith  are  hereby  revoked. 


310  Federal  Income  Tax 

(T.  D.  2193.) 

Compromises. 

Minimum  amounts  which  will  be  accepted  in  settlement  of  the 
specific  penalty. 

With  reference  to  corporations  and  individuals  who  have 
failed  to  file  returns  of  annual  net  income  within  the  pre- 
scribed time  for  the  year  1914,  you  are  advised  that  it  has 
been  determined  by  the  Treasury  Department  to  accept  offers 
in  compromise  of  the  specific  23«nalties  in  minimum  sums 
as  follows :  $10  from  corporations  and  $5  from  individuals. 

Where  such  delinquents  failed  to  file  returns  for  1913 
within  the  prescribed  time,  offers  for  1914  delinquencies  will 
be  accepted  as  follows:  $15  from  corporations  and  $7.50 
from  individuals. 

The  foregoing  applies  only  to  those  cases  where  there  was 
no  intention  to  evade  the  law  or  escape  taxation. 

The  minimum  sum  of  $15  also  applies  to  corporations  ''not 
organized  for  profit"  which  were  relieved  of  the  specific 
penalty  for  failing  to  file  returns  within  the  prescribed 
time  for  1913. 

In  preparing  compromise  cases  for  transmission  to  this 
office,  a  notation  should  be  made  on  Form  656  in  the  case 
of  corporations  and  individuals  also  delinquent  for  1913,  in 
order  that  proper  consideration  can  be  given  the  offers  in 
accordance  with  the  above  schedule. 

In  the  case  of  delinquent  withholding  agents,  offers  in 
compromise  of  not  less  than  $5  in  settlement  of  the  specific, 
penalty  may  be  accepted  for  deposit  where  it  is  believed  that 
the  delinquency  was  due  simply  to  oversight  or  lack  of  in- 
formation concerning  the  requirements  of  the  law.  It  should 
be  made  clear,  however,  that  each  case  will  be  decided  upon 
its  merits,  and  where  the  facts  indicate  carelessness  or  disre- 
gard of  the  law  such  offers  will  no  doubt  be  rejected. 

Offers  in  compromise  can  not  receive  favorable  considera- 
tion in  cases  where  the  returns  for  the  year  in  question  have 
not  been  filed.     In  such  cases  the  recommendation  that  the 


Treasury  Department  Special  Rulings         311 

offer  be  accepted  should  be  made  "subject  to  the  filing  of  the 
return,"  the  date  of  filing  to  be  furnished  promptly  upon 
receipt  of  the  return. 


(T.  D.  2201— See  2224.) 

Bad  Debts. 

Bad  debts  which,  if  collected,  would  constitute  income  in  their  en- 
tirety, are  not  deductible  in  a  return  ot  annual  net  income  unless 
the  amount  ot  such  items  has  been  entered  on  the  books  of  the 
taxpayer  as  income  and  such  entry  has  been  made  within  the 
year  for  which  such  amount  is  sought  to  be  deducted  as  a  bad 
debt. 

Debts  on  account  of  unpaid  wages,  salaries,  rents,  or  items 
of  a  similar  character  which,  if  collected,  would  be  properly 
included  in  gross  income  in  returns  of  annual  net  income  will 
not  constitute  an  allowable  deduction  from  gross  income  as 
bad  debts  in  ascertaining  taxable  net  income  unless  the 
amount  representing  such  debts  has  been  entered  on  the 
books  of  the  taxpayer  and  included  as  income  in  his  income 
tax  return  for  the  year  in  which  the  deduction  is  claimed, 
and  has  also  been  charged  off,  as  required  by  law,  it  being 
specifically  provided  that  only  such  debts  due  to  the  taxpayer 
actually  ascertained  to  be  worthless  and  charged  off  within 
the  year  may  be  deducted  as  bad  debts.  An  entry  of  the 
item  on  the  books  and  its  inclusion  in  gross  income  must, 
therefore,  precede  the  charging  off  of  such  item  and  its  de- 
duction as  a  bad  debt. 


(T.  D.  2221.) 

Revising  T.  D.  2201  of  April  28,  1915,  relative  to  bad  debts  as  an 
allowable  deduction  under  paragraph  B  of  the  act  of  October  3, 
1913. 

Debts  arising  from  unpaid  wages,  salaries,  rents,  and  items 
of  similar  taxable  income  due  and  payable  on  or  after  March 


312  Federal  Income  Tax 

1,  1913,  will  not  be  allowed  as  general  deductions  under 
paragraph  B  of  the  income  tax  law  unless  the  income  which 
they  represent  has  been  included  in  a  return  of  gross  income 
for  the  year  in  which  the  deduction  as  a  bad  debt  is  sought 
to  be  made  or  in  a  previous  year  and  the  debts  themselves 
have  been  actually  ascertained  to  be  worthless  and  charged 
off. 

All  debts  representing  amounts  that  became  due  and  pay- 
able prior  to  March  1,  1913,  and  not  ascertained  to  be  worth- 
less prior  to  that  date,  whether  representing  income  or  a 
return  of  capital,  are  held  to  be  allowable  deductions  under 
paragraph  B  of  the  law  in  a  return  of  income  for  the  year 
in  which  they  are  actually  ascertained  to  be  worthless  and 
are  charged  off. 

T.  D.  2201  and  all  other  regulations  inconsistent  herewith 
are  hereby  superseded. 


(T.  D.  2231— See  T.  D.  2289.) 

Amendment  of  regulations  requiring  return  and  payment  of  tax  by 
fiduciaries  under  trust  estates. 

Guardians,  trustees,  executors,  administrators,  agents, 
receivers,  conservators,  and  all  persons,  corporations,  or  asso- 
ciations acting  in  any  fiduciary  capacity,  hereinafter  referred 
to  as  fiduciary  agents,  who  hold  in  trust  an  estate  of  another 
person  or  persons,  shall  be  designated  the  "source"  for  the 
purpose  of  collecting  the  income  tax,  and  by  filing  notice  with 
other  debtors  or  withholding  agents  said  fiduciary  shall  be 
exempt  from  having  any  income,  due  to  them  as  such,  with- 
held for  any  income  tax  by  any  other  debtor  or  withholding 
agent.  Other  debtors  or  withholding  agents  upon  receipt  of 
such  notice  shall  not  withhold  any  part  of  such  income  from 
said  fiduciary  and  will  not  in  such  case  be  held  liable  for 
normal  tax  of  1  per  cent  due  thereon.     The  form  of  notice 


Treasuey  Department  Special  Rulings         313 

to  be  filed  with  the  debtor  or  withholding  agent  by  fiduciary 
will  be  on  Form  1015.  Where  such  exemption  is  not 
claimed,  notice  thereof  on  Form  1019  should  be  filed  with 
the  withholding  agent ;  provided,  that  Form  1019  can  not  be 
used  when  the  income  affected  is  payable  by  the  fiduciary  to 
a  beneficiary  who  would  not  be  liable  under  the  statute  for 
income  tax  if  such  income  were  payable  to  such  beneficiary 
directly. 

Fiduciaries  shall,  on  or  before  March  1  of  each  year,  make 
and  render  a  return,  in  form  prescribed  by  the  Commissioner 
of  Internal  Revenue,  of  the  income  coming  into  their  custody 
or  control  and  management  from  each  trust  estate  when  the 
annual  interest  of  any  beneficiary  in  the  income  of  said  trust 
estate  subject  to  the  normal  tax  is  in  excess  of  $3,000,  and 
also  when  the  undistributed  income  of  the  estate  (as  an  entity 
or  beneficiary  in  and  of  itself  for  tax  purposes),  consisting 
of  income  from  dividends  of  corporations  and  other  income 
(or  of  dividends  alone),  shall  exceed  $20,000.  In  such  cases 
the  estate  shall  be  reported  as  a  beneficiary  for  the  undis- 
tributed income. 

Notice  of  failure  to  file  a  return  as  required  shall  be  served 
upon  the  fiduciary.    (See  Art.  18.) 

The  entries  on  the  first  page  of  Form  1041,  in  column  3, 
beaded  "Beneficiaries'  interest  in  amount  reported  on  line  5, 
whether  distributed  or  not,"  should  not  include  their  respect- 
ive shares  of  income  derived  from  dividends  on  the  stock  or 
from  the  net  earnings  of  corporations,  joint-stock  companies, 
etc.,  subject  to  like  tax,  or  the  income  on  which  the  normal 
tax  has  beeen  deducted  and  withheld  at  the  source  by  the 
debtor  or  prior  withholding  agent.  These  two  items  should 
be  treated  as  deductions  in  determining  the  amount  of  in- 
come subject  to  the  normal  tax  and  for  which  the  fiduciary 
as  withholding  agent  is  to  account. 

The  income  of  trust  estates,  as  any  other  income,  is  subject 
to  the  income  tax.  When  such  income  is  received  annually 
by  a  beneficiary  of  an  estate  the  fiduciary  will  withhold  the 


314  Federal  Income  Tax 

normal  tax  due  and  subject  to  withholding  by  him.  Any 
part  of  the  annual  income  of  trust  estates  not  distributed 
becomes  an  entity  and,  as  such,  is  liable  for  the  normal  and 
additional  tax,  which  must  be  paid  by  the  fiduciary.  When 
the  beneficiary  is  not  in  esse  and  the  income  of  the  estate  is 
retained  by  the  fiduciary,  such  income  will  be  taxable  to  the 
estate  as  for  an  individual  and  the  fiduciary  will  pay  the 
tax,  both  normal  and  additional.  When  the  beneficiary 
receives  a  part  only  of  the  income  to  which  he  is  entitled 
from  the  estate  and  the  balance  is  retained  by  the  fiduciary 
the  normal  tax  will  be  withheld  on  the  income  paid  to  the 
beneficiary  and  the  amount  of  such  income  retained  by  the 
fiduciary  will  be  treated  as  income  taxable  to  the  estate  for 
both  the  normal  and  additional  tax,  which  tax  will  be  paid 
by  the  fiduciary.  When  the  gross  net  income  not  distributed 
and  remaining  in  the  hands  of  a  fiduciary  is  less  than  $20,- 
000  the  estate  will  be  listed  as  a  beneficiary,  and  only  the 
normal  income  tax  will  be  assessable,  and  such  tax  will  be 
paid  by  the  fiduciary.  When  the  gross  net  income  not  dis- 
tributed and  remaining  in  the  hands  of  a  fiduciary  exceeds 
$20,000  such  income  is  subject  to  both  the  normal  and  addi- 
tional tax,  and  the  estate  will  be  listed  as  a  beneficiary  and 
both  the  normal  and  additional  tax  will  be  paid  by  the  fidu- 
ciary. 

In  all  eases  where  fiduciaries  act  for  minors  or  other  in- 
competents they  are  held,  for  the  purpose  of  the  income  tax, 
to  be  acting  as  the  agents  of  such  minors  or  other  incompe- 
tents and  must  pay  all  tax  (normal  and  additional)  charge- 
able on  such  income  in  their  hands  as  though  the  persons  for 
whom  they  act  were  acting  for  themselves. 

T.  D.  1906  and  T.  D.  1943  and  Articles  70,  71,  74,  and  75 
of  Regulations  33,  and  all  other  regulations  so  far  as  incon- 
sistent herewith,  are  hereby  superseded. 


Tbeasuby  Depabtiiext  Special  Rulings         315 

(T.  D.  2242.) 

Nonresident  aliens — Definition  of  residence  in  subdivision  1, 
paragraph  A,  and  T.  D.  2109  of  December  28,  1914. 

"Residence,"  as  used  in  subdivision  1  of  paragraph  A  of 
the  act  of  October  3,  1913,  and  T.  D.  2109,  is  held  to  be- 
That  place  where  a  man  has  his  true,  fixed,  and  permanent  home 
and  principal  establishment  and  to  which,  whenever  he  is  absent,  he 
has  the  intention  of  returning,  and  indicates  permanency  of  occupa- 
tion as  distinct  from  lodging  or  boarding  or  temporary  occupation. 

For  the  purposes  of  the  income  tax  it  is  held  that  where, 
for  business  purposes  or  otherwise,  an  alien  is  permanently 
located  in  the  United  States,  has  there  his  principal  business 
establishment,  and  is  there  permanently  occupied  or  em- 
ployed, even  though  his  domicile  may  be  without  the  United 
States,  he  will  be  held  to  be  within  the  definition  of  "every 
person  residing  in  the  United  States,  though  not  a  citizen 
thereof  *  *  *  ,"  while  aliens  who  are  physically  present 
in  the  United  States  but  only  temporarily  resident  or  em- 
ployed therein  (as  for  a  season  or  other  similarly  definite 
term,  and  with  the  expectation  or  intention  of  leaving  the 
United  States  upon  the  termination  of  employment  or  accom- 
plishment of  the  purpose  which  necessitated  presence  in  the 
United  States)  are  within  the  class  of  "persons  residing  else- 
where   *    *    *    ." 

Aliens  coming  to  the  United  States  with  the  intention  of 
becoming  residents  thereof  within  the  meaning  and  intent  of 
the  income  tax  statute  may  establish  that  fact  and  have  the 
privilege  of  resident  aliens  under  the  statute  by  filing  with 
withholding  agents  a  certificate  in  the  following  form,  under 
oath,  and  which  certificate  shall  be  filed  by  said  withholding 
agents  with  collectors  of  internal  revenue  as  justification  for 
withholding  on  the  basis  of  "residence"  in  the  United  States. 


316 


Federal  Income  Tax 


Form 
1078 


ri     H 


w      i 

Q     2 


CEETIFICATE. 

Certificate  of  residence — Claim  by  aliens. 

(To  be  filed  by  aliens  with  withholding  agents  when  residence  in  the  United 
States  is  a  fact,  for  the  purpose  of  claiming  the  benefit  of  residence  for  income- 
tax  purposes,  where  otherwise  status  would  be  that  of  a  nonresident  alien.) 

I  hereby  declare  that  I  am  a  citizen  or  subject  of ; 

that  I  arrived  in  the  United  States  on  or  about  ,  and 

that  it  is  my  intention  to  establish  and  maintain  a  resi- 
dence in  the  United  States;  that  the  address  in  the  United 
States  where  any  and  all  notices  and  communications  rela- 
tive to  my  liability  for  any  income  tax  may  be  sent  or 
mailed  to  me  is 


(Street  and  number.) 


(State.) 


(City.) 
(Signed)  

Sworn  to  and  subscribed  before  me  this  day  of , 

191 

(Official  capacity.) 

Said  certificate  shall  be  in  size  8  by  31/-)  inches  and  shall 
be  printed  to  read  from  left  to  right  along  the  8-inch  dimen- 
sion. It  shall  be  printed  on  blue  paper  corresponding  in 
weight  and  texture  to  white  writing  paper  21  by  32,  about 
40  pounds  to  the  ream  of  500  sheets,  and  will  be  provided 
by  the  Government  and  furnished  without  cost  to  the  users 
thereof. 


(T.  D.  2258.) 

Execution  of  income-tax  ownership  certificates  by  banks  and  trust 

companies. 

You  are  advised  that  as  a  convenience  to  banks  and  trust 
companies  having  a  large  number  of  ownership  certificates 
to  execute  in  the  collection  of  interest  on  bonds  it  is  hereby 
provided  that  the  name  of  the  bank  or  trust  company  may 
be  printed  or  stamped  and  the  facsimile  of  the  signature  of 
the  person  authorized  to  sign  for  the  bank  or  trust  company 
in  executing  the  said  ownership  certificates  may  be  printed 


Treasury  Department  Special  Rulings         317 

or  stamped  on  the  certificates:  Provided,  That  in  all  cases 
the  bank  or  trust  company  shall  first  file  with  the  Commis- 
sioner of  Internal  Revenue  a  certificate  of  its  authorization 
in  substantially  the  following  form : 


(City.) 


(Date.) 
The  Commissioner  of  Internal  Revenue,  Washington,  D.  C. 

The  undersigned  hereby  authorizes  the  use  of  the  facsimile  signa- 
ture shown  below  upon  all  income-tax  ownership  certificates  issued 
in  its  name  until  this  authorization  is  revoked  by  written  notice  to 
you. 

(Name  of  bank  or  trust  company.) 

By 

(Signature  of  person  authorized  to  sign.) 
(Official  position.) 


(Facsimile  signature  of  person 
authorized  to  sign.) 


(T.  D.  2267.) 

Depreciation  not  allowed  fiduciaries  as  a  deduction  from  gross  in- 
come in  cases  where  no  depreciation  reserve  is  maintained,  but 
the  amount  claimed  as  a  deduction  for  depreciation  is  paid  to 
the  beneficiary  as  income. 

To  collectors  of  internal  revenue: 

In  the  case  of  a  trust  estate  where  the  terms  of  the  will  or 
trust  or  the  decree  of  a  court  of  competent  jurisdiction  pro- 
vide for  keeping  the  corpus  of  the  estate  intact  and  where 
physical  property  forming  a  part  of  the  corpus  of  such  estate 
has  suffered  depreciation  through  its  employment  in  business 
this  office  will  permit  a  deduction  from  gross  income  for  the 
purpose  of  caring  for  this  depreciation,  where  the  deduction 
is  applied  or  held  by  the  fiduciary  for  making  good  such  de- 
preciation.    No  depreciation  deduction  will  be  permitted  by 


318  Federal  Income  Tax 

fiduciaries  otherwise  than  as  here  provided.  Fiduciaries 
should  set  forth  in  connection  with  their  returns  the  pro- 
vision of  the  will  or  trust  or  decree  requiring  such  deprecia- 
tion deduction  where  any  exists,  or  that  actual  depreciation 
occurs,  the  amount  thereof,  and  that  the  same  has  been  or 
will  be  preserved  and  applied  as  such. 

The  intent  and  purpose  of  this  regulation  is  to  deny  to 
fiduciaries  the  right  of  claiming  a  deduction  for  depreciation 
in  returns  for  the  income  tax  of  beneficiaries  when,  in  fact, 
no  dej)reciation  reserve  is  established  nor  is  authorized  to  be 
established,  but  the  amount  claimed  as  a  deduction  for  depre- 
ciation is  actually  paid  to  the  beneficiary  as  income. 

All  amounts  paid  by  fiduciaries  to  beneficiaries  of  trust 
estates  from  the  income  of  such  trust  estates  are  held  to  be 
distributions  of  income  and  will  be  treated  for  income-tax 
purposes  in  accordance  with  the  provisions  of  the  law  and 
regulations  applicable  to  the  income  of  such  beneficiaries. 

Nothing  in  this  regulation  shall  be  construed  to  deny  the 
right  of  trustees  to  make  deductions  from  gross  income  for 
expenses  actually  incurred  for  repairs  and  such  other  neces- 
sary expenses  other  than  betterments  as  may  be  required  to 
preserve  the  corpus  of  the  estate  in  accordance  with  the  facts, 
actual  application,  or  reservation  of  the  necessary  amounts 
or  proper  provisions  of  the  trust,  the  requirements  of  law,  or 
the  order  of  a  court  of  competent  jurisdiction. 


(T.  D.  2274.) 

Revision  of  T.  D.  2163  of  February  18,  1915,  defining  the  taxable 
status  of  stock  dividends  paid  on  the  capital  stock  from  the  cur- 
rent net  earnings  or  established  surplus  created  from  the  net 
earnings  of  corporations,  joint-stock  companies  or  associations, 
and  insurance  companies  taxable  upon  their  net  income. 

To  collectors  of  internal  revenue: 

Cash  dividends  or  their  equivalent  paid  from  the  net  earn- 
ings or  the  established  surplus  or  undivided  profits  of  corpo- 


Treasury  Department  Special  Rulings         319 

rations,  joint-stock  companies  or  associations,  and  insurance 
companies,  if  declared  and  paid  on  or  after  March  1,  1913, 
constitute  taxable  income  in  the  hands  of  shareholders  or 
beneficiaries  when  received,  and  should  be  returned  when 
the  total  net  income  of  any  individual  is  in  excess  of  $20,000, 
inclusive  of  such  dividends,  and  the  additional  tax  should  be 
paid  thereon  as  on  income  for  the  year  in  which  such  divi- 
dends were  received,  without  regard  to  the  period  in  which 
the  profits  or  surplus  were  earned  or  the  period  during  which 
they  were  carried  as  surplus  or  undivided  profits  in  the  treas- 
ury or  on  the  books  of  the  corporations,  etc. 

Stock  dividends  paid  from  the  net  earnings  or  the  estab- 
lished surplus  or  undivided  profits  of  corporations,  joint- 
stock  companies  or  associations,  and  insurance  companies,  are 
held  to  be  the  equivalent  of  cash,  and  to  constitute  taxable  in- 
come under  the  same  conditions  as  cash  dividends. 

T.  D.  2163  of  February  18,  1915,  is  hereby  revised,  and 
all  rulings  or  parts  of  rulings  heretofore  made  which  are  in 
conflict  herewith  are  hereby  revoked. 


(T.  D.  2289,  Revising  2231,  Jan.  28,  1916.) 

T.  D.  2231  is  hereby  amended  to  provide  that  fiduciaries 
having  control  of  any  portion  of  income  accruing  during  the 
year  to  known  beneficiaries,  other  than  trust  estates  as  pro- 
vided in  T.  D.  2231,  but  not  distributed  or  paid  to  the  bene- 
ficiaries during  the  year,  shall,  in  rendering  their  annual 
return  (Form  1041),  give  the  name  and  address  of  each  of 
said  beneficiaries  having  a  distributive  interest  in  said  in- 
come, and  shall  furnish  all  the  information  called  for  in 
such  returns. 

In  all  such  cases  the  fiduciary  shall  withhold  and  pay  to 
the  collector,  as  provided  by  law,  the  normal  tax  of  1  per 
cent  upon  the  distributive  interest  of  each  of  said  beneficiaries 
when  such  interest  is  in  excess  of  $3,000,  the  same  as  if  said 
income  were  actually  distributed  and  paid  to  the  beneficiary. 


320  Fedebal  Income  Tax 

Exemption  under  paragraph  C,  however,  may  be  claimed  by 
the  beneficiary  or  his  legal  representative  by  filing  his  claim 
for  exemption  with  the  fiduciary  agent. 

When  the  normal  tax  on  undivided  annual  net  income  has 
been  so  withheld,  such  tax  shall  not  be  again  withheld  when 
such  portion  of  the  income  is  actually  distributed  and  paid 
to  said  beneficiary,  but  the  beneficiary  will  account  for  such 
income  in  his  return  of  income  for  the  year  in  which  the  same 
is  actually  received  by  him,  entering  in  column  "A"  the 
amount  of  income  on  which  the  normal  tax  has  heretofore 
been  paid. 


PART  V 


United  States  Supreme  Court  opinion  in  Brushaber  v.  Union  Pacific 

Railroad,  January  24,  1916,  construing  the  statute 

and  the  Sixteenth  Amendment 


21 


See  1fl3  for  Synopsis,  and  the  Index  to  this  volume,  for 
references  to  details,  abbreviated  as  "Sup.  Ct.,"  followed  by 
the  page  number. 


Supreme  Court  of  the  United  States. 
(No.  140.    October  Term,  1915.) 

Frank  R.  Bkushabeb,  Appellant,  v.  Union  Pacific  Rail- 

eoad  Co.     Appeal  from  the  District  Court  of  the 

United  States  for  the  Southern  District  of  New 

York. 

(January  24,  1916.) 

Mr.  Chief  Justice  White  delivered  the  opinion  of  the  court. 

As  a  stockholder  of  the  Union  Pacific  Railroad  Co.  the  ap- 
pellant filed  his  bill  to  enjoin  the  corporation  from  complying 
with  the  income-tax  provisions  of  the  tariff  act  of  October  3, 
1913  (Sec.  II,  ch.  16,  38  Stat,  166).  Because  of  constitu- 
tional questions  duly  arising  the  case  is  here  on  direct  appeal 
from  a  decree  sustaining  a  motion  to  dismiss  because  no 
ground  for  relief  was  stated. 

The  right  to  prevent  the  corporation  from  returning  and 
paying  the  tax  was  based  upon  many  averments  as  to  the 
repugnancy  of  the  statute  to  the  Constitution  of  the  United 
States,  of  the  peculiar  relation  of  the  corporation  to  the  stock- 
holders and  their  particular  interests  resulting  from  any  of 
the  administrative  provisions  of  the  assailed  act,  of  the  con- 
fusion, wrong,  and  multiplicity  of  suits  and  the  absence  of 
all  means  of  redress  which  would  result  if  the  corporation 
paid  the  tax  and  complied  with  the  act  in  other  respects  with- 
out protest,  as  it  was  alleged  it  was  its  intention  to  do.  To 
put  out  of  the  way  a  question  of  jurisdiction,  we  at  once  say 
that  in  view  of  these  averments  and  the  ruling  in  Pollock  v. 
Fanners'  Loan  and  Trust  Co.  (157  U.  S.,  429),  sustaining 
the  right  of  a  stockholder  to  sue  to  restrain  a  corporation 
under  proper  averments  from  voluntarily  paying  a  tax 
charged  to  be  unconstitutional  on  the  ground  that  to  permit 
such  a  suit  did  not  violate  the  prohibitions  of  section  3224, 
Revised  Statutes,  against  enjoining  the  enforcement  of  taxes, 
we  are  of  opinion  that  the  contention  here  made  that  there 
was  no  jurisdiction  of  the  cause,  since  to  entertain  it  would 
violate  the  provisions  of  the  Revised  Statutes  referred  to,  is 


324  Federal  Income  Tax 

without  merit.  Before  coming  to  dispose  of  the  case  on  the 
merits,  however,  we  observe  that  the  defendant  corporation 
having  called  the  attention  of  the  Government  to  the  pendency 
of  the  cause  and  the  nature  of  the  controversy  and  its  unwill- 
ingness to  voluntarily  refuse  to  conijdy  with  the  act  assailed, 
the  United  States  as  amicus  curias  has  at  bar  been  heard  both 
orally  and  by  brief  for  the  purpose  of  sustaining  the  decree. 

Aside  from  averments  as  to  citizenship  and  residence, 
recitals  as  to  the  provisions  of  the  statute  and  statements  as 
to  the  business  of  the  corporation  contained  in  the  first  10 
paragraphs  of  the  bill  advauced  to  sustain  jurisdiction,  the 
bill  alleged  21  constitutional  objections  specified  in  that  num- 
ber of  paragraphs  or  subdivisions.  As  all  the  grounds  assert 
a  violation  of  the  Constitution,  it  follows  that  in  a  wide  sense 
they  all  charge  a  repugnancy  of  the  statute  to  the  sixteenth 
amendment,  under  the  more  immediate  sanction  of  which  the 
statute  was  adopted. 

The  various  propositions  are  so  intermingled  as  to  cause  it 
to  be  difficult  to  classify  them.  We  are  of  opinion,  however, 
that  the  confusion  is  not  inherent,  but  rather  arises  from  the 
conclusion  that  the  sixteenth  amendment  provides  for  a  hith- 
erto unknown  power  of  taxation ;  that  is,  a  power  to  levy  an 
income  tax  which,  although  direct,  should  not  be  subject  to 
the  regulation  of  apportionment  applicable  to  all  other  direct 
taxes.  And  the  far-reaching  effect  of  this  erroneous  assump- 
tion will  be  made  clear  by  generalizing  the  many  contentions 
advanced  in  argument  to  support  it,  as  follows:  (a)  The 
amendment  authorizes  only  a  particular  character  of  direct 
tax  without  apportionment,  and  therefore  if  a  tax  is  levied 
under  its  assumed  authority  which  does  not  partake  of  the 
characteristics  exacted  by  the  amendment  it  is  outside  of  the 
amendment  and  is  void  as  a  direct  tax  in  the  general  consti- 
tutional sense  because  not  apportioned,  (b)  As  the  amend- 
ment authorizes  a  tax  only  upon  incomes  "from  whatever 
source  derived,"  the  exclusion  from  taxation  of  some  income 
of  designated  persons  and  classes  is  not  authorized,  and  hence 
the  constitutionality  of  the  law  must  be  tested  by  the  general 


The  Brushaber  Case  325 

provisions  of  the  Constitution  as  to  taxation,  and  thus  again 
the  tax  is  void  for  want  of  apportionment,  (c)  As  the  right 
to  tax  "incomes  from  whatever  source  derived"  for  which 
the  amendment  provides  must  be  considered  as  exacting  in- 
trinsic uniformity,  therefore  no  tax  comes  imder  the  author- 
ity of  the  amendment  not  conforming  to  such  standard,  and 
hence  all  the  provisions  of  the  assailed  statute  must  once 
more  be  tested  solely  under  the  general  and  preexisting  pro- 
visions of  the  Constitution,  causing  the  statute  again  to  be 
void  in  the  absence  of  apportionment,  (d)  As  the  power  con- 
ferred by  the  amendment  is  new  and  prospective  the  attempt 
in  the  statute  to  make  its  provisions  retroactively  apply  is 
void,  because  so  far  as  the  retroactive  period  is  concerned  it 
is  governed  by  the  preexisting  constitutional  requirement  as 
to  apportionment. 

But  it  clearly  results  that  the  proposition  and  the  conten- 
tions under  it,  if  acceded  to,  would  cause  one  provision  of  the 
Constitution  to  destroy  another ;  that  is,  they  would  result  in 
bringing  the  provisions  of  the  amendment  exempting  a  direct, 
tax  from  apportionment  into  irreconcilable  conflict  with  the 
general  requirement  that  all  direct  taxes  be  apportioned. 
Moreover,  the  tax  authorized  by  the  amendment,  being  direct, 
would  not  come  under  the  rule  of  uniformity  applicable  under 
the  Constitution  to  other  than  direct  taxes,  and  thus  it  would 
come  to  pass  that  the  result  of  the  amendment  would  be  to 
authorize  a  particular  direct  tax  not  subject  either  to  appor- 
tionment or  to  the  rule  of  geographical  uniformity,  thus  giv- 
ing power  to  impose  a  different  tax  in  one  State  or  States 
than  was  levied  in  another  State  or  States.  This  result  in- 
stead of  simplifying'  the  situation  and  making  clear  the  lim- 
itations on  the  taxing  power,  which  obviously  the  amendment 
must  have  intended  to  accomplish,  would  create  radical  and 
destructive  changes  in  our  constitutional  system  and  multiply 
confusion. 

But  let  us  by  a  demonstration  of  the  error  of  the  funda- 
mental proposition  as  to  the  significance  of  the  amendment 
dispel  the  confusion  necessarily  arising  from  the  arguments 


326  Federal  Income  Tax 

deduced  from  it.  Before  coming,  however,  to  the  text  of  the 
amendment,  to  the  end  that  its  significance  may  be  deter- 
mined in  the  light  of  the  previous  legislative  and  judicial 
history  of  the  subject  with  which  the  amendment  is  concerned 
and  with  a  knowledge  of  the  conditions  which  presumptively 
led  up  to  its  adoption  and  hence  of  the  purpose  it  was  in- 
tended to  accomplish,  we  make  a  brief  statement  on  those 
subjects. 

That  the  authority  conferred  upon  Congress  by  section  8 
of  Article  I,  "to  lay  and  collect  taxes,  duties,  imposts,  and 
excises,"  is  exhaustive  and  embraces  every  conceivable  power 
of  taxation  has  never  been  questioned,  or,  if  it  has,  has  been 
so  often  authoritatively  declared  as  to  render  it  necessary 
only  to  state  the  doctrine.  And  it  has  also  never  been  ques- 
tioned from  the  foundation,  without  stopping  presently  to 
determine  under  which  of  the  separate  headings  the  power 
was  properly  to  be  classed,  that  there  was  authority  given,  as 
the  part  was  included  in  the  whole,  to  lay  and  collect  income 
taxes.  Again  it  has  never,  moreover,  been  questioned  that 
the  conceded  complete  and  all-embracing  taxing  power  was 
subject,  so  far  as  they  were  respectively  applicable,  to  limita- 
tions resulting  from  the  requirements  of  Article  I,  section  8, 
clause  1,  that  "all  duties,  imposts,  and  excises  shall  be  uni- 
form throughout  the  United  States,"  and  to  the  limitations 
of  Article  I,  section  2,  clause  3,  that  "direct  taxes  shall  be 
apportioned  among  the  several  States,"  and  of  Article  I, 
section  9,  clause  4,  that  "no  capitation  or  other  direct  tax 
shall  be  laid,  unless  in  proportion  to  the  census  or  enumera- 
tion hereinbefore  directed  to  be  taken."  In  fact,  the  two 
great  subdivisions  embracing  the  complete  and  perfect  dele- 
gation of  the  power  to  tax  and  the  two  correlated  limitations 
as  to  such  power  were  thus  aptly  stated  by  Mr.  Chief  Justice 
Fuller  in  Pollock  v.  Farmers'  Loan  and  T?~ust  Co.,  supra,  at 
page  557 :  "In  the  matter  of  taxation,  the  Constitution 
recognizes  the  two  great  classes  of  direct  and  indirect  taxes, 
and  lays  down  two  rules  by  which  their  imposition  must  be 
governed,  namely,  the  rule  of  apportionment  as  to  direct 


The  Brushaber  Case  327 

taxes  and  the  rule  of  uniformity  as  to  duties,  imposts,  and 
excises."  It  is  to  be  observed,  however,  as  long  ago  pointed 
out  in  Veazie  Bank  v.  Fenno  (8  Wall.,  533,  541),  that  the 
requirement  of  apportionment  as  to  one  of  the  great  classes 
and  of  uniformity  as  to  the  other  class  were  not  so  much  a 
limitation  upon  the  complete  and  all-embracing  authority  to 
tax,  but  in  their  essence  were  simply  regulations  concerning 
the  mode  in  which  the  plenary  power  was  to  be  exerted.  In 
the  whole  history  of  the  Government  down  to  the  time  of  the 
adoption  of  the  sixteenth  amendment,  leaving  aside  some  con- 
jectures expressed  of  the  possibility  of  a  tax  lying  interme- 
diate between  the  two  great  classes  and  embraced  by  neither, 
no  question  has  been  anywhere,  made  as  to  the  correctness  of 
these  propositions.  At  the  very  beginning,  however,  there 
arose  differences  of  opinion  concerning  the  criteria  to  be 
applied  in  determining  in  which  of  the  two  great  subdivisions 
a  tax  would  fall.  Without  pausing  to  state  at  length  the 
basis  of  these  differences  and  the  consequences  which  arose 
from  them,  as  the  whole  subject  was  elaborately  reviewed  in 
Pollock  v.  Farmers'  Loan  and  Trust  Co.  (157  U.  S.,  429; 
158  TJ.  S.,  601),  we  make  a  condensed  statement  which  is, 
in  substance,  taken  from  what  was  said  in  that  case.  Early 
the  differences  were  manifested  in  pressing  on  the  one  hand 
and  opposing  on  the  other  the  passage  of  an  act  levying  a  tax 
without  apportionment  on  carriages  "for  the  conveyance  of 
persons,"  and  when  such  a  tax  was  enacted  the  question  of 
its  repugnancy  to  the  Constitution  soon  came  to  this  court  for 
determination.  (Ilylton  v.  United  States,  3  Dall.,  171.)  It 
was  held  that  the  tax  came  within  the  class  of  excises,  duties, 
and  imposts,  and  therefore  did  not  require  apportionment, 
and  while  this  conclusion  was  agreed  to  by  all  the  members 
of  the  court  who  took  part  in  the  decision  of  the  case,  there 
was  not  an  exact  coincidence  in  the  reasoning  by  which  the 
conclusion  was  sustained.  Without  stating  the  minor  differ- 
ences, it  may  be  said  with  substantial  accuracy  that  the  diver- 
gent reasoning  was  this :  On  the  one  hand,  that  the  tax  was 
not  in  the  class  of  direct  taxes  requiring  apportionment,  be- 


328  Federal  Income  Tax 

cause  it  was  not  levied  directly  on  property  because  of  its 
ownership,  but  rather  on  its  use,  and  was,  therefore,  an  ex- 
cise, duty,  or  impost ;  and,  on  the  other,  that  in  any  event  the 
class  of  direct  taxes  included  only  taxes  directly  levied  on 
real  estate  because  of  its  ownership. 

Putting  out  of  view  the  difference  of  reasoning  which  led 
to  the  concurrent  conclusion  in  the  Hylton  case,  it  is  un- 
doubted that  it  came  to  pass  in  the  legislative  practice  that 
the  line  of  demarcation  between  the  two  great  classes  of  direct 
taxes  on  the  one  hand  and  excises,  duties,  and  imposts  on  the 
other,  which  was  exemplified  by  the  ruling  in  that  case,  was 
accepted  and  acted  upon.  In  the  first  place,  this  is  shown  by 
the  fact  that  wherever — and  there  were  a  number  of  cases  of 
that  kind — a  tax  was  levied  directly  on  real  estate  or  slaves 
because  of  ownership  it  was  treated  as  coming  within  the 
direct  class,  and  apportionment  was  provided  for,  while  no 
instance  of  apportionment  as  to  any  other  kind  of  tax  is 
afforded.  Again,  the  situation  is  aptly  illustrated  by  the  vari- 
ous acts  taxing  incomes  derived  from  property  of  every  kind 
and  nature  which  were  enacted  beginning  in  1861  and  lasting 
during  what  may  be  termed  the  Civil  War  period.  It  is  not 
disputable  that  these  latter  taxing  laws  were  classed  under 
the  head  of  excises,  duties,  and  imposts,  because  it  was  as- 
sumed that  they  were  of  that  character,  inasmuch  as,  although 
putting  a  tax  burden  on  income  of  every  kind,  including  that 
derived  from  property,  real  or  personal,  they  were  not  taxes 
directly  on  property  because  of  its  ownership.  And  this  prac- 
tical construction  came  in  theory  to  be  the  accepted  one,  since 
it  was  adopted  without  dissent  by  the  most  eminent  of  the 
text-writers.  (1  Kent  Com.,  254,  256;  1  Story  Const.,  sec. 
955  ;  Cooley  Const.  Lim.  (5th  ed.),  *480 ;  Miller  on  the  Con- 
stitution, 237 ;  Pomeroy's  Const.  Law,  sec.  281 ;  Hare  Const. 
Law,  vol.  1,  249,  250 ;  Burroughs  on  Taxation,  502 ;  Ordro- 
naux,  Const.  Leg.,  225.) 

Upon  the  lapsing  of  a  considerable  period  after  the  repeal 
of  the  income-tax  laws  referred  to,  in  1894  an  act  was  passed 
laying  a;  tax  on  incomes  from  all  classes  of  property  and  other 


The  Brushaber  Case  329 

sources  of  revenue  which  was  not  apportioned,  and  which, 
therefore,  was,  of  course,  assumed  to  come  within  the  classi- 
fication of  excises,  duties,  and  imposts  which  were  siibject  to 
the  rule  of  uniformity  but  not  to  the  rule  of  apportionment. 
The  constitutional  validity  of  this  law  was  challenged  on  the 
ground  that  it  did  not  fall  within  the  class  of  excises,  duties, 
and  imposts,  but  was  direct  in  the  constitutional  sense,  and 
was  therefore  void  for  want  of  apportionment ;  and  that  ques- 
tion came  to  this  court  and  was  passed  upon  in  Pollock  v. 
Farmers'  Loan  and  Trust  Co.  (157  IT.  S.,  429;  158  U.  S., 
601).  The  court,  fully  recognizing  in  the  passage  which  we 
have  previously  quoted  the  all-embracing  character  of  the  two 
great  classifications,  including,  on  the  one  hand,  direct  taxes 
subject  to  apportionment,  and,  on  the  other,  excises,  duties, 
and  imposts  subject  to  uniformity,  held  the  law  to  be  uncon- 
stitutional in  substance  for  these  reasons:  Concluding  that 
the  classification  of  direct  was  adopted  for  the  purpose  of 
rendering  it  impossible  to  burden  by  taxation  accumulations 
of  property,  real  or  personal,  except  subject  to  the  regulation 
of  apportionment,  it  was  held  that  the  duty  existed  to  fix 
what  was  a  direct  tax  in  the  constitutional  sense  so  as  to 
accomplish  this  purpose  contemplated  by  the  Constitution. 
(157  U.  S.j  581.)  Coming  to  consider  the  validity  of  the  tax 
from  this  point  of  view,  while  not  questioning  at  all  that  in 
common  understanding  it  was  direct  merely  on  income  and 
only  indirect  on  property,  it  was  held  that  considering  the 
substance  of  things  it  was  direct  on  property  in  a  constitu- 
tional sense,  since  to  burden  an  income  by  a  tax  was,  from 
the  point  of  substance,  to  burden  the  property  from  which 
the  income  was  derived  and  thus  accomplish  the  very  thing 
which  the  provision  as  to  apportionment  of  direct  taxes  was 
adopted  to  prevent.  As  this  conclusion  but  enforced  a  regu- 
lation as  to  the  mode  of  exercising  power  under  particular 
circumstances,  it  did  not  in  any  way  dispute  the  all-embracing 
taxing  authority  possessed  by  Congress,  including  necessarily 
therein  the  poAver  to  impose  income  taxes  if  only  they  con- 
formed to  the  constitutional  regulations  which  were  appli- 


330  Federal  Income  Tax 

cable  to  them.  Moreover,  in  addition,  the  conclusion  reached 
in  the  Pollock  case  did  not  in  any  degree  involve  holding  that 
income  taxes  generieally  and  necessarily  came  within  the 
class  of  direct  taxes  on  property,  but,  on  the  contrary,  recog- 
nized the  fact  that  taxation  on  income  was  in  its  nature  an 
excise  entitled  to  be  enforced  as  such  unless  and  until  it  was 
concluded  that  to  enforce  it  would  amount  to  accomplishing 
the  result  which  the  requirement  as  to  apportionment  of  direct 
taxation  was  adopted  to  prevent,  in  which  case  the  duty  would 
arise  to  disregard  form  and  consider  substance  alone,  and 
hence  subject  the  tax  to  the  regulation  as  to  apportionment, 
which  otherwise  as  an  excise  would  not  apply  to  it.  Nothing 
could  serve  to  make  this  clearer  than  to  recall  that  in  the 
Pollock  case,  in  so  far  as  the  law  taxed  incomes  from  other 
classes  of  property  than  real  estate  and  invested  personal  prop- 
erty— that  is,  income  from  "professions,  trades,  employments, 
or  vocations"  (158  U.  S.,  637) — its  validity  was  recognized; 
indeed,  it  was  expressly  declared  that  no  dispute  was  made 
upon  that  subject,  and  attention  was  called  to  the  fact  that 
taxes  on  such  income  had  been  sustained  as  excise  taxes  in 
the  past.  (lb.,  p.  635.)  The  whole  law  was,  however,  de- 
clared unconstitutional  on  the  ground  that  to  permit  it  to  thus 
operate  would  relieve  real  estate  and  invested  personal  prop- 
erty from  taxation  and  "would  leave  the  burden  of  the  tax  to 
be  borne  by  professions,  trades,  employments,  or  vocations, 
and  in  that  way  what  was  intended  as  a  tax  on  capital  would 
remain,  in  substance,  a  tax  on  occupations  and  labor"  (ib., 
p.  637),  a  result  which  it  was  held  could  not  have  been  con- 
templated by  Congress. 

This  is  the  text  of  the  amendment: 

The  Congress  shall  have  power  to  lay  and  collect  taxes  on  incomes, 
from  whatever  source  derived,  without  apportionment  among  the 
several  States,  and  without  regard  to  any  census  or  enumeration. 

It  is  clear  on  the  face  of  this  text  that  it  does  not  purport 
to  confer  power  to  levy  income  taxes  in  a  generic  sense — an 
authority  already  possessed  and  never  questioned — or  to  limit 
and  distinguish  between  one  kind  of  income  taxes  and  another, 


The  Brushabek  Case  331 

but  that  the  whole  purpose  of  the  amendment  was  to  relieve 
all  income  taxes  when  imposed  from  apportionment  from  a 
consideration  of  the  source  whence  the  income  was  derived. 
Indeed,  in  the  light  of  the  history  which  we  have  given  and  of 
the  decision  in  the  Pollock  case  and  the  ground  upon  which 
the  ruling  in  that  case  was  based,  there  is  no  escape  from  the 
conclusion  that  the  amendment  was  drawn  for  the  purpose  of 
doing  away  for  the  future  with  the  principle  upon  which  the 
Pollock  case  was  decided ;  that  is,  of  determining  whether  a 
tax  on  income  was  direct,  not  by  a  consideration  of  the  burden 
placed  on  the  taxed  income  upon  which  it  directly  operated, 
but  by  taking  into  view  the  burden  which  resulted  on  the 
property  from  which  the  income  was  derived,  since  in  express 
terms  the  amendment  provides  that  income  taxes,  from  what- 
ever source  the  income  may  be  derived,  shall  not  be  subject  to 
the  regulation  of  apportionment.  From  this,  in  substance,  it 
indisputably  arises,  first,  that  all  the  contentions  which  we 
have  previously  noticed  concerning  the  assumed  limitations  to 
be  implied  from  the  language  of  the  amendment  as  to  the 
nature  and  character  of  the  income  taxes  which  it  authorizes 
find  no  support  in  the  text  and  are  in  irreconcilable  conflict 
with  the  very  purpose  which  the  amendment  was  adopted  to 
accomplish.  Second,  that  the  contention  that  the  amendment 
treats  a  tax  on  income  as  a  direct  tax,  although  it  is  relieved 
from  apportionment  and  is  necessarily  therefore  not  subject  to 
the  rule  of  uniformity,  as  such  rule  only  applies  to  taxes  which 
are  not  direct,  thus  destroying  the  two  great  classifications 
which  have  been  recognized  and  enforced  from  the  beginning, 
is  also  wholly  without  foundation,  since  the  command  of  the 
amendment,  that  all  income  taxes  shall  not  be  subject  to  ap- 
portionment by  a  consideration  of  the  sources  from  which 
the  taxed  income  may  be  derived,  forbids  the  application  to 
such  taxes  of  the  rule  applied  in  the  Pollock  case  by  which 
alone  such  taxes  were  removed  from  the  great  class  of  excises, 
duties,  and  imposts  subject  to  the  rule  of  uniformity  and 
were  placed  under  the  other  or  direct  class.  This  must  be 
unless  it  can  be  said  that  although  the  Constitution,  as  a  result 


332  Federal  Income  Tax 

of  the  amendment,  in  express  terms  excludes  the  criterion 
of  source  of  income,  that  criterion  yet  remains  for  the  pur- 
pose of  destroying  the  classifications  of  the  Constitution  hy 
taking  an  excise  out  of  the  class  to  which  it  belongs  and 
transferring  it  to  a  class  in  which  it  can  not  be  placed  con- 
sistently with  the  requirements  of  the  Constitution.  Indeed, 
from  another  point  of  view,  the  amendment  demonstrates  that 
no  such  purpose  was  intended  and,  on  the  contrary,  shows 
that  it  was  drawn  with  the  object  of  maintaining  the  limita- 
tions of  the  Constitution  and  harmonizing  their  operation. 
We  say  this  because  it  is  to  be  observed  that  although  from  the 
date  of  the  Hylton  case,  because  of  statements  made  in  the 
opinions  in  that  case,  it  had  come  to  be  accepted  that  direct 
taxes  in  the  constitutional  sense  were  confined  to  taxes  levied 
directly  on  real  estate  because  of  its  ownership,  the  amend- 
ment contains  nothing  repudiating  or  challenging  the  ruling 
in  the  Pollock  case  that  the  word  direct  had  a  broader  signifi- 
cance since  it  embraced  also  taxes  levied  directly  on  personal 
property  because  of  its  ownership,  and  therefore  the  amend- 
ment at  least  impliedly  makes  such  wider  significance  a  part 
of  the  Constitution— a  condition  which  clearly  demonstrates 
that  the  purpose  was  not  to  change  the  existing  interpretation 
except  to  the  extent  necessary  to  accomplish  the  result  in- 
tended ;  that  is,  the  prevention  of  the  resort  to  the  sources 
from  which  a  taxed  income  was  derived  in  order  to  cause  a 
direct  tax  on  the  income  to  be  a  direct  tax  on  the  source  itself, 
and  thereby  to  take  an  income  tax  out  of  the  class  of  excises, 
duties,  and  imposts  and  place  it  in  the  class  of  direct  taxes. 

We  come,  then,  to  ascertain  the  merits  of  the  many  con- 
tentions made  in  the  light  of  the  Constitution  as  it  now 
stands  ;  that  is  to  say,  including  within  its  terms  the  provisions 
of  the  sixteenth  amendment  as  correctly  interpreted.  We 
first  dispose  of  two  propositions  assailing  the  validity  of  the 
statute  on  the  one  hand  because  of  its  repugnancy  to  the 
Constitution  in  other  respects,  and  especially  because  its 
enactment  was  not  authorized  by  the  sixteenth  amendment. 

The  statute  was  enacted  October  3,  1913,  and  provided  for 


The  Beushaber  Case  333 

a  general  yearly  income  tax  from  December  to  December  of 
each  year.  Exceptionally,  however,  it  fixed  a  first  period 
embracing  only  the  time  from  March  1,  to  December  31, 
1913,  and  this  limited  retroactivity  is  assailed  as  repugnant 
to  the  due-process  clause  of  the  fifth  amendment  and  as  incon- 
sistent with  the  sixteenth  amendment  itself.  But  the  date  of 
the  retroactivity  did  not  extend  beyond  the  time  when  the 
amendment  was  operative,  and  there  can  be  no  dispute  that 
there  was  power  by  virtue  of  the  amendment  during  that 
period  to  levy  the  tax,  without  apportionment,  and  so  far  as 
the  limitations  of  the  Constitution  in  other  respects  are  con- 
cerned, the  contention  is  not  open,  since  in  Stockdale  v.  In- 
surance Companies  (20  Wall.,  323,  331),  in  sustaining  a  pro- 
vision in  a  prior  income-tax  law  which  was  assailed  because 
of  its  retroactive  character,  it  was  said : 

The  right  of  Congress  to  have  imposed  this  tax  by  a  new  statute, 
although  the  measure  of  it  was  governed  by  the  income  of  the  past 
year,  cannot  be  doubted;  much  less  can  it  be  doubted  that  it  could 
impose  such  a  tax  on  the  income  of  the  current  year,  though  part  of 
that  year  had  elapsed  when  the  statute  was  passed.  The  joint  reso- 
lution of  July  4,  1864,  imposed  a  tax  of  5  per  cent  upon  all  income  of 
the  previous  year,  although  one  tax  on  it  had  already  been  paid,  and 
no  one  doubted  the  validity  of  the  tax  or  attempted  to  resist  it. 

The  statute  provides  that  the  tax  should  not  apply  to  enu- 
merated organizations  or  corporations,  such  as  labor,  agricul- 
tural, or  horticultural  organizations,  mutual  savings  banks, 
etc.,  and  the  argument  is  that  as  the  amendment  authorized 
a  tax  on  incomes  "from  whatever  source  derived,"  by  impli- 
cation it  excluded  the  power  to  make  these  exemptions.  But 
this  is  only  a  form  of  expressing  the  erroneous  contention  as 
to  the  meaning  of  the  amendment,  which  we  have  already  dis- 
posed of.  And  so  far  as  this  alleged  illegality  is  based  on 
other  provisions  of  the  Constitution,  the  contention  is  also  not 
open,  since  it  was  expressly  considered  and  disposed  of  in 
Flint  v.  Stone  Tracy  Co.  (220  U.  S.,  108,  173). 

Without  expressly  stating  all  the  other  contentions,  we 
summarize  them  to  a  degree  adequate  to  enable  us  to  typify 
and  dispose  of  all  of  them. 


334  Fedekal  Income  Tax 

1.  The  statute  levies  one  tax  called  a  normal  tax  on  all 
incomes  of  individuals  up  to  $20,000  and  from  that  amount 
up  by  gradations,  a  progressively  increasing  tax  called  an 
additional  tax,  is  imposed.  No  tax,  however,  is  levied  upon 
incomes  of  unmarried  individuals  amounting  to  $3,000  or 
less  nor  upon  incomes  of  married  persons  amounting  to 
$4,000  or  less.  The  progressive  tax  and  the  exempted 
amounts,  it  is  said,  are  based  on  wealth  alone,  and  the  tax  is 
therefore  repugnant  to  the  due-process  clause  of  the  fifth 
amendment. 

2.  The  act  provides  for  collecting  the  tax  at  the  source — 
that  is,  makes  it  the  duty  of  corporations,  etc.,  to  retain  and 
pay  the  sum  of  the  tax  on  interest  due  on  bonds  and  mort- 
gages, unless  the  owner  to  whom  the  interest  is  payable  gives 
a  notice  that  he  claims  an  exemption.  This  duty  cast  upon 
corporations,  because  of  the  cost  to  which  they  are  subjected, 
is  asserted  to  be  repugnant  to  due  process  of  law  as  a  taking 
of  their  property  without  compensation,  and  we  recapitulate 
various  contentions  as  to  discrimination  against  corporations 
and  against  individuals  predicated  on  provisions  of  the  act 
dealing  with  the  subject: 

(a)  Corporations  indebted  upon  coupon  or  registered  bonds 
are  discriminated  against,  since  corporations  not  so  indebted 
are  relieved  of  any  labor  or  expense  involved  in  deducting 
and  paying  the  taxes  of  individuals  on  the  income  derived 
from  bonds. 

(b)  Of  the  class  of  corporations  indebted  as  above  stated, 
the  law  further  discriminates  against  those  which  have  as- 
sumed the  payment  of  taxes  on  their  bonds,  since  although 
some  or  all  of  their  bondholders  may  be  exempt  from  taxation, 
the  corporations  have  no  means  of  ascertaining  such  fact, 
and  it  would  therefore  result  that  taxes  would  often  be  paid 
by  such  corporations  when  no  taxes  were  owing  by  the  indi- 
viduals to  the  Government. 

(c)  The  law  discriminates  against  owners  of  corporate 
bonds  in  favor  of  individuals  none  of  whose  income  is  derived 
from  such  property,  since  bondholders  are,  during  the  in- 


The  Beushabek  Case  335 

terval  between  the  deducting  and  the  paying  of  the  tax  on 
their  bonds,  deprived  of  the  use  of  the  money  so  withheld. 

(d)  Again  corporate  bondholders  are  discriminated 
against  because  the  law  does  not  release  them  from  payment 
of  taxes  on  their  bonds  even  after  the  taxes  have  been  de- 
ducted by  the  corporation,  and  therefore  if  after  deduction 
the  corporation  should  fail,  the  bondholders  would  be  com- 
pelled to  pay  the  tax  a  second  time. 

(e)  Owners  of  bonds  the  taxes  on  which  have  been  as- 
sumed by  the  corporation  are  discriminated  against,  because 
the  payment  of  the  taxes  by  the  corporation  does  not  relieve 
the  bondholders  of  their  duty  to  include  the  income  from  such 
bonds  in  making  a  return  of  all  income,  the  result  being  a 
double  payment  of  the  taxes,  labor  and  expense  in  applying 
for  a  refund,  and  a  deprivation  of  the  use  of  the  sum  of  the 
taxes  during  the  interval  which  elapses  before  they  are  re- 
funded. 

3.  The  provision  limiting  the  amount  of  interest  paid 
which  may  be  deducted  from  gross  income  of  corporations 
for  the  purpose  of  fixing  the  taxable  income  to  interest  on 
indebtedness  not  exceeding  one-half  the  sum  of  bonded  indebt- 
edness and  paid-up  capital  stock,  is  also  charged  to  be  want- 
ing in  due  process  because  discriminating  between  different 
classes  of  corporations  and  individuals. 

4.  It  is  urged  that  want  of  due  process  results  from  the 
provision  allowing  individuals  to  deduct  from  their  gross 
income  dividends  paid  them  by  corporations  whose  incomes 
are  taxed  and  not  giving  such  right  of  deduction  to  corpora- 
tions. 

5.  Want  of  due  process  is  also  asserted  to  result  from  the 
fact  that  the  act  allows  a  deduction  of  $3,000  or  $4,000  to 
those  who  pay  the  normal  tax ;  that  is,  whose  incomes  are 
$20,000  or  less,  and  does  not  allow  the  deduction  to  those 
whose  incomes  are  greater  than  $20,000 ;  that  is,  such  per- 
sons are  not  allowed  for  the  purpose  of  the  additional  or  pro- 
gressive tax  a  second  right  to  deduct  the  $3,000  or  $4,000 
wbich  they  have  already  enjoyed.     And  a  further  violation 


336  Federal  Income  Tax 

of  due  process  is  based  on  the  fact  that  for  the  purpose  of 
the  additional  tax  no  second  right  to  deduct  dividends  re- 
ceived from  corporations  is  permitted. 

6.  In  various  forms  of  statement  want  of  due  process,  it 
is,  moreover,  insisted,  arises  from  the  provisions  of  the  act 
allowing  a  deduction  for  the  purpose  of  ascertaining  the  tax- 
able income  of  stated  amounts  on  the  ground  that  the  pro- 
visions discriminate  between  married  and  single  people  and 
discriminate  between  husbands  and  wives  who  are  living  to- 
gether and  those  who  are  not. 

7.  Discrimination  and  want  of  due  process  results,  it  is 
said,  from  the  fact  that  the  owners  of  houses  in  which  they 
live  are  not  compelled  to  estimate  the  rental  value  in  making 
uj)  their  incomes,  while  those  who  are  living  in  rented  houses 
and  pay  rent  are  not  allowed,  in  making  up  their  taxable  in- 
come, to  deduct  rent  which  they  have  paid,  and  that  want  of 
due  process  also  results  from  the  fact  that  although  family 
expenses  are  not  as  a  rule  permitted  to  be  deducted  from  gross 
to  arrive  at  taxable  income,  farmers  are  permitted  to  omit 
from  their  income  return  certain  products  of  the  farm  which 
are  susceptible  of  use  by  them  for  sustaining  their  families 
during  the  year. 

So  far  as  these  numerous  and  minute,  not  to  say  in  many 
respects  hypercritical,  contentions  are  based  upon  an  assumed 
violation  of  the  uniformity  clause,  their  want  of  legal  merit 
is  at  once  apparent,  since  it  is  settled  that  that  clause  exacts 
only  a  geographical  uniformity,  and  there  is  not  a  semblance 
of  ground  in  any  of  the  propositions  for  assuming  that  a  vio- 
lation of  such  uniformity  is  complained  of.  (Knoivlton  v. 
Moore,  178  U.  S.,  41 ;  Patton  v.  Brady,  184  U.  S.,  608,  622  ; 
Flint  v.  Stone  Tracy  Co.,  220  U.  S.,  107,  158;  Billings  v. 
United  States,  232  U.  S.,  608,  622.) 

So  far  as  the  due-process  clause  of  the  fifth  amendment  is 
relied  upon,  it  suffices  to  say  that  there  is  no  basis  for  such 
reliance,  since  it  is  equally  well  settled  that  such  clause  is  not 
a  limitation  upon  the  taxing  power  conferred  upon  Congress 
by  the  Constitution ;  in  other  words,  that  the  Constitution 


The  Brdshabee  Case  337 

does  not  conflict  with  itself  by  conferring  upon  the  one  hand 
a  taxing  power  and  taking  the  same  power  away  on  the  other 
by  the  limitations  of  the  due-process  clause.  {Treat  v.  White, 
181  U.  S.,  264;  Patton  v.  Brady,  184  U.  S.,  608;  McCray 
v.  United  States,  195  TJ.  S.,  27,  61 ;  Flint  v.  Stone  Tracy  Co., 
supra;  Billings  v.  United  States,  232  U.  S.,  261,  282.)  And 
no  change  in  the  situation  here  would  arise  even  if  it  be  con- 
ceded, as  we  think  it  must  be,  that  this  doctrine  would  have 
no  application  in  a  case  where,  although  there  was  a  seeming 
exercise  of  the  taxing  power,  the  act  complained  of  was  so 
arbitrary  as  to  constrain  to  the  conclusion  that  it  was  not  the 
exertion  of  taxation,  but  a  confiscation  of  property ;  that  is,  a 
taking  of  the  same  in  violation  of  the  fifth  amendment,  or, 
what  is  equivalent  thereto,  was  so  wanting  in  basis  for  classi- 
fication as  to  produce  such  a  gross  and  patent  inequality  as 
to  inevitably  lead  to  the  same  conclusion.  We  say  this  be- 
cause none  of  the  propositions  relied  upon  in  the  remotest 
degree  present  such  questions. 

It  is  true  that  it  is  elaborately  insisted  that  although  there 
be  no  express  constitutional  provision  prohibiting  it,  the  pro- 
gressive feature  of  the  tax  causes  it  to  transcend  the  concep- 
tion of  all  taxation  and  to  be  a  mere  arbitrary  abuse  of  power 
which  must  be  treated  as  wanting  in  due  process.  But  the 
proposition  disregards  the  fact  that  in  the  very  early  history 
of  the  Government  a  progressive  tax  was  imposed  by  Congress, 
and  that  such  authority  was  exerted  in  some  if  not  all  of  the 
various  income  taxes  enacted  prior  to  1894,  to  which  we  have 
previously  adverted.  And  over  and  above  all  this  the  conten- 
tion but  disregards  the  further  fact  that  its  absolute  want  of 
foundation  in  reason  was  plainly  pointed  out  in  Knowlton  v. 
Moore,  supra,  and  the  right  to  urge  it  was  necessarily  fore- 
closed by  the  ruling  in  that  case  made.  In  this  situation  it  is, 
of  course,  superfluous  to  say  that  arguments  as  to  the  expedi- 
ency of  levying  such  taxes  or  of  the  economic  mistake  or 
wrong  involved  in  their  imposition  are  beyond  judicial  cog- 
nizance. Besides  this  demonstration  of  the  want  of  merit  in 
the  contention  based  upon  the  progressive  feature  of  the  tax, 
22 


338  Federal  Income  Tax 

the  error  in  the  others  is  equally  well  established,  either  by 
prior  decisions  or  by  the  adequate  bases  for  classification 
which  are  apparent  on  the  face  of  the  assailed  provisions ; 
that  is,  the  distinction  between  individuals  and  corporations, 
the  difference  between  various  kinds  of  corporations,  etc. 
Knowlton  v.  Moore,  supra;  Flint  v.  Stone  Tracy  Co.,  supra  j 
Billings  v.  United  States,  supra;  National  Bank  v.  Common- 
wealth (9  Wall.,  353)  ;  National  Safe  Deposit  Co.  v.  Illinois 
(232  U.  S.,  58,  70).  In  fact,  comprehensively  surveying  all 
the  contentions  relied  upon,  aside  from  the  erroneous  con- 
struction of  the  amendment  which  we  have  previously  dis- 
posed of,  we  can  not  escape  the  conclusion  that  they  all  rest 
upon  the  mistaken  theory  that  although  there  be  differences 
between  the  subjects  taxed,  to  differently  tax  them  transcends 
the  limit  of  taxation  and  amounts  to  a  want  of  due  process, 
and  that  where  a  tax  levied  is  believed  by  one  who  resists  its 
enforcement  to  be  wanting  in  wisdom  and  to  operate  injus- 
tice, from  that  fact  in  the  nature  of  things  there  arises  a  want 
of  due  process  of  law  and  a  resulting  authority  in  the  judici- 
ary to  exceed  its  powers  and  correct  what  is  assumed  to  be 
mistaken  or  unwise  exertions  by  the  legislative  authority  of 
its  lawful  powers,  even  although  there  be  no  semblance  of 
warrants  in  the  Constitution  for  so  doing. 

We  have  not  referred  to  a  contention  that  because  certain 
administrative  powers  to  enforce  the  act  were  conferred  by 
the  statute  upon  the  Secretary  of  the  Treasury,  therefore  it 
was  void  as  unwarrantedly  delegating  legislative  authority, 
because  we  think  to  state  the  proposition  is  to  answer  it. 
Field  v.  Clark  (143  U.  S.,  649)  ;  Buttfieldv.  Stranahan  (192 
IT.  S.,  470,  496)  ;  Oceanic  Steam  Navigation  Co.  v.  Strana- 
han (214  IT.  S.,  320). 

Affirmed. 

Mr.  Justice  McReynolds  took  no  part  in  the  consideration 
and  decision  of  this  case. 


PART  VI 


FORMS  FOR  INDIVIDUAL  AND  CORPORATION 
RETURNS,  WITH  INSTRUCTIONS 


Different  forms,  but  essentially  similar,  are  required  for 
Insurance  Companies,  Fiduciaries,  and  withholding  agents. 
See  paragraph  53. 


Form  1031. 

(Revised  September,  1915.) 
CORPORATIONS 

(OTHEB  THAN  INSURANCE  COMPANIES) 

(  Calendar  ) 
Retubn  of  Net  Income  for  the  -j    *piscai    j  year  ended ,  191... 


by ,.-- - ;- 

(Name  of  corporation,  joint-stock  company,  or  association.)       (Kind  of  business.) 

and  located  at 


Street  and  number.)  (City  or  town.)  (State.) 

(The  address  given  must  be  that  of  the  principal  place  of  business  of  the  corporation.) 

If  no  figures  are  to  be  extended  opposite  any  item  in  the  return, 
the  word  "None"  should  be  inserted. 


Total  amount  of  paid-up  capital  stock  outstanding 
at  the  close  of  the  year  or,  if  no  capital  stock,  the 
capital  employed  in  the  business 

Total  amount  of  bonded  and  other  interest-bearing 
indebtedness  outstanding  at  close  of  year,  exclusive 
of  indebtedness  wholly  secured  by  collateral,  the 
Bubject  of  sale  in  ordinary  business  of  the  corpora- 
tion.  


Gross  Income: 

Dollars 

Cta. 

$ 

$ 

$ 

$ 

Total 

$ 

342 


Federal  Income  Tax 


Deductions 

4.  (a)  Expenses,  general 

(6)  Payments  in  lieu  of  rent 

5.  (a)  LoBses  sustained 

(6)  Depreciation 

(c)  Depletion  (natural  deposits) 

6.  (a)  Interest  paid  (see  Note  6a) 

(6)  Interest  paid  by  banks  on  deposits.. 

7.  (a)  Taxes,  domestic  paid 

(6)  Taxes,  foreign  paid 

Total  deductions 


Dollars 


Cts. 


We,  ,  president,  and ,  treasurer, 

of  the  above-named  company,  whose  return  of  net  income  is  herein 
set  forth,  being  severally  duly  sworn,  each  for  himself,  deposes  and 
says  that  the  items  entered  in  the  foregoing  report  and  in  the  sup- 
plementary statement  and  in  any  additional  list  or  lists  attached  to 
or  accompanying  this  return  are,  to  his  best  knowledge  and  belief 
and  from  such  information  as  he  has  been  able  to  obtain,  true  and 
correct  in  each  and  every  particular. 


President. 


Treasurer. 
Sworn  to  and  subscribed  before  me  this  day  of ,  191 


(Seal  of  officer 
taking  affidavit.) 


(Official  capacity.) 


GENERAL   INSTRUCTIONS. 


Time  of  filing  returns. — Returns  made  on  the  basis  of  a  calendar 
year  must  be  filed  on  or  before  March  1  with  the  collector  of  in- 
ternal revenue  of  the  district  in  which  is  located  the  principal  place 


Forms  and  Instructions  343 

of  business  of  the  corporation;  if  made  on  the  basis  of  a  fiscal  year* 
they  must  be  gled  within  60  days  after  the  close  of  such  year. 

*Fiscal  year. — Corporations  desiring  to  make  returns  of  annual 
net  income  on  the  basis  of  a  fiscal  year  other  than  the  calendar  year, 
must,  not  less  than  30  days  prior  to  March  1,  file  with  the  collector 
a  notice  in  writing  designating  the  last  day  of  some  month  as  the 
close  of  such  fiscal  year.  A  return  for  that  portion  of  the  calendar 
year  preceding  the  first  full  fiscal  year  thus  established  must  be  filed 
on  or  before  March  1  of  the  next  calendar  year,  and  the  return  for  the 
fiscal  year  (12  months)  must  be  filed  on  or  before  the  last  day  of 
the  60-day  period  next  following  the  closing  date  of  the  fiscal  year. 

Extension  of  time. — In  the  case  of  neglect  to  file  the  return  within 
the  prescribed  time,  the  collector  is  authorized  to  grant  an  extension 
of  the  filing  period  not  exceeding  30  days,  provided  such  neglect  was 
due  to  absence  or  sickness  of  an  officer  required  to  sign  the  return, 
and  provided  an  application  in  writing  is  made  prior  to  the  expira- 
tion of  the  period  for  which  extension  may  be  granted. 

Signatures  and  verification. — Returns  must  be  signed  and  verified 
by  two  officers  of  the  corporation,  that  is,  by  the  president  vice- 
president,  or  other  principal  officer,  and  the  treasurer  or  other  finan- 
cial officer,  and  must  be  sworn  to  before  an  officer  authorized  to  ad- 
minister oaths  and  the  seal  of  the  attesting  officer,  if  he  is  required 
to  have  a  seal,  must  be  impressed  on  the  return  in  the  space  pro- 
vided for  that  purpose. 

Subsidiary  companies. — The  corporation  making  this  return  should 
attach  hereto  a  list  of  all  its  subsidiary  companies,  if  any,  with  the 
location  of  the  principal  place  of  business  of  each.  Each  subsidiary 
company  must  make  a  separate  and  distinct  return. 

Foreign  corporations.— Foreign  corporations  subject  to  the  law  are 
required  to  make  returns  to  the  collector  of  the  district  in  which 
the  principal  place  of  business  in  the  United  States  is  located.  The 
gross  income  to  be  returned  is  that  received  from  business  trans- 
acted and  capital  invested  in  the  United  States.  The  deductions 
allowable  are  those  losses  and  disbursements  incident  and  necessary 
to  the  transaction  of  the  business  in  this  country,  all  as  specifically 
set  out  in  the  act.  Foreign  taxes  are  not  deductible  from  the  gross 
income  arising  and  accruing  to  a  foreign  corporation  from  business 
done  or  capital  invested  in  the  United  States. 

Penalties. — Corporations  refusing  or  neglecting  to  file  returns 
within  the  time  prescribed  by  law  or  rendering  false  or  fraudulent 
returns  shall  be  liable  to  a  penalty  of  not  exceeding  $10,000,  and  an 
additional  tax  of  50  per  cent  in  case  of  neglect  to  file  the  return 
within  the  time  prescribed  by  law,  and  100  per  cent  in  the  case  of  a 
false  or  fraudulent  return  shall  be  added  to  the  assessment. 


344 


Federal  Income  Tax 


Any  officer  of  any  corporation  required  by  law  to  make,  render, 
sign,  or  verify  any  return,  who  makes  any  false  or  fraudulent  return 
or  statement  with  intent  to  defeat  or  evade  the  assessment  required 
to  be  made  shall  be  guilty  of  a  misdemeanor,  and  shall  be  fined  not 
exceeding  $2,000  or  be  imprisoned  not  exceeding  one  year,  or  both, 
at  the  discretion  of  the  court,  with  the  costs  of  prosecution. 

SUPPLEMENTABY   STATEMENT. 

The  following  information  must  be  furnished  by  every  corporation, 
joint-stock  company,  or  association,  without  which  the  return  will 
not  be  accepted  as  complete.  The  items  herein  relate  to  the  items 
listed  above  and  bear  corresponding  numbers,  and  the  totals  must 
agree  with  the  totals  set  out  in  the  above  return. 

1.  Paid-up  Capital  Stock: 

Unissued  or  treasury  stock  should  not  be  included  in  this  item, 
but  only  such  stock  as  has  been  actually  issued  and  is  outstanding 
at  the  close  of  the  year  and  for  which  payment  has  been  received. 
Where  the  stock  issued  is  payable  in  installments  or  assessments, 
only  so  much  of  it  as  has  been  actually  paid  in  upon  such  install- 
ments or  assessments  should  be  reported. 

In  case  no  stock  is  issued  there  should  be  reported  the  amount  of 
capital  actually  employed  in  the  business  and  property  of  the  corpo- 
ration at  the  close  of  the  year. 


$ 

$ 

$ 

2.  Indebtedness: 

All  interest-bearing  indebtedness,  for  the  payment  of  which  the 
corporation  or  its  property  is  hound,  should  he  reported  below.  In 
the  case  of  banking  corporations  and  like  financial  institutions  de- 
posits should  not  be  reported  as  indebtedness.  Indebtedness  wholly 
secured  by  collateral,  the  subject  of  sale  in  the  ordinary  business  of 
the  corporation,  should  be  reported  here,  but  such  indebtedness  must 
not  be  entered  under  item  2  above  nor  be  considered  in  determining 
the  amount  of  interest  deductible  under  item  6  (a). 


Foems  and  Instructions 


345 


Charaoter  of  Obligation 

Rate  of 
Interest 

Principal 

$ 

$ 

3.  Gboss  Income: 

All  manufacturing,  mercantile,  and  other  corporations  which  de- 
termine their  annual  gain  or  loss  by  inventory  are  required  to  state 
the  same  in  the  form  indicated  below.  If  the  annual  income  or  loss 
is  determined  otherwise,  the  methods  employed  must  be  stated  in  the 
space  provided. 

The  profit  or  income  to  be  returned  in  the  event  of  the  sale  of 
capital  assets  should  be  determined  upon  the  basis  of  the  difference 
between  the  cost  and  selling  price  of  such  assets.  If  the  assets  were 
acquired  prior  to  January  1,  1909,  the  profit  resulting  from  their  sale 
may  be  prorated,  in  which  case  the  amount  apportioned  to  the  years 
subsequent  to  January  1,  1909,  will  be  included  as  income  of  the  year 
in  which  sold. 

(o)  From  Operations:  Per  inventory — 


Sales  during  year 

Stock    on    hand    at 

, 

Total  .. 

$____! 1 

% 

Stock  on  band  at  be- 

Total 

$.... 

Total  gain  or  loss 
[3  (a),  first  page]. 

$.... 

In  the  case  of  manufacturing  corporations  "Purchases  during  the  year"  will  include 
so  much  of  the  cost  of  goods,  finished  or  unfinished,  sold  or  unsold,  as  has  not  been  sepa- 
rately deducted  under  any  item  of  the  return. 

Overhead  charges  should  not  be  included  in  inventory  (see  Item  4). 


(If  inventory  shows  loss,  make  entry  in  red  ink  or  strike  out  gain.) 


346 


Federal  Income  Tax 


If  inventory  is  not  used,  state  below  method  of  determining  gain 
or  loss  from  operations: 


(6)  From  Rentals:  Rentals  to  be  reported  as  income  will  include 
all  payments  received  in  cash  or  its  equivalent  as  rent  on  buildings 
or  other  property  owned  by  the  corporation  making  the  return,  as 
well  as  all  royalties  received. 

(c)  From  Interest:  Interest  to  be  reported  as  income  includes  all 
interest  received  on  bonds  or  securities  owned  by  the  corporation 
with  the  exception  of  interest  on  obligations  of  a  State  or  political 
subdivision  thereof  or  interest  upon  the  obligations  of  the  United 
States  or  its  possessions,  which  latter  interest  for  the  purpose  of  in- 
formation should  be  extended  below: 

UNITED  STATES,  STATE,  AND  OTHER  OBLIGATIONS. 


Name  of  Obligation 

Amount  of 
Principal 

Rate 

Amount  of  Inter- 
est Received 

$ 

S 

Total 

% 

$ 

(d)  From  Dividends  Received:  Dividends  received  upon  the  stock 
of  other  corporations  must  be  included  in  the  gross  income  of  the 
corporation  receiving  the  same  and  are  not  deductible  from  gross  in- 
come in  ascertaining  the  net  income  upon  which  the  tax  is  computed. 

(e)  From  Other  Sources:  All  other  sources  from  which  income 
has  been  received,  and  the  amount  thereof,  should  be  itemized  below: 


S 

Total 

$ 

Forms  and  Instructions 


347 


deductions. 
4.  Expenses,  Genebal: 

The  items  below  should  only  include  the  ordinary  and  necessary 
expenses  paid  within  the  year  in  the  maintenance  and  operation  of 
the  business  and  properties  of  the  corporation,  not  including  interest 
payments  (which  are  to  be  reported  under  item  6  (a) ),  except  inter- 
est paid  on  indebtedness  wholly  secured  by  collateral  the  subject  of 
sale  in  the  ordinary  business  of  the  corporation,  which  interest  may 
be  reported  under  this  item  as  an  expense. 

All  expenses  for  material,  labor,  fuel,  and  other  items  entering  into 
the  cost  of  the  goods  produced,  sold,  or  inventoried  are  deductible 
under  this  head  as  expense,  provided  such  items  have  not  been  con- 
sidered in  determining  the  income  derived  from  operations  under 
item  3  (a),  Inventory. 

Expenditures  for  incidental  repairs  which  do  not  add  to  the  value 
of  the  property  are  deductible  as  expenses,  but  expenditures  for  addi- 
tions and  betterments  which  add  to  the  value  of  the  property  are  not 
deductible  under  this  or  any  other  item  of  the  return.  Expenditures 
for  renewals  and  replacements  are  not,  as  such,  deductible  as  ex- 
penses, but  should  be  charged  to  depreciation  reserve  account. 

Salaries  of  officers  in  order  to  constitute  an  allowable  deduction 
must  be  reasonable  compensation  for  the  services  rendered  and  must 
not  be  based  upon  the  stock  holdings  nor  comprehend  any  compensa- 
tion for  capital  invested  in  the  business. 

Payments  in  lieu  of  rent  should  be  reported  separately  under  item 
4  (6). 


(a)  1.    Labor,  wages,  commissions,  et 

$ 

4,  Repairs,  ordinary  and  incident 

5.  Interest  on  indebtedness  who 

lateral  the  subject  of  sale,  et 

aL 

ly  secured  by  col- 

$ 

348 


Federal  Income  Tax 


4.  (a)  8.  Names  of  officers  and  employees  to  whom  salaries  of  $3,000 
or  more  were  paid  during  the  year  and  amount  paid  to  each.  (If  the 
space  below  is  not  adequate,  a  list  marked  "Item  4  (a)"  containing 
this  information  should  he  attached  to  this  form.) 


Name 

Amount 

S 

Total _ 

s 

(6)  Payments  in  Lieu  of  Rent:  This  item  should  include  all  royal- 
ties, as  well  as  interest  paid  in  lieu  of  rent  on  mortgages  secured  by 
property  which  the  corporation  occupies  but  which  it  does  not  own 
and  in  which  it  has  no  equity.    See  Note  6  (a). 

5.  (a)  Losses: 

Losses  deductible  under  this  item  must  be  distinguished  from  de- 
preciation or  allowances  for  wear  and  tear,  exhaustion,  or  obsoles- 
cence of  property.  The  losses  must  be  absolute,  complete,  actually 
sustained  during  the  year,  and  charged  off  on  the  books  of  the  cor- 
poration, and  if  the  loss  results  from  the  sale  of  assets  acquired 
prior  to  January  1,  1909,  such  loss  shall  be  prorated  and  the  amount 
apportioned  to  the  years  subsequent  to  January  1,  1909,  may  be  de- 
ducted under  this  item. 

Losses  compensated  by  insurance  or  otherwise  are  not  deductible. 


Kind  of  Asset 

Original 
Amount 

Date  Charged  Off 

Amount  Charged  Off 

$ 

8 

Total 

$ 

When  were  the  deducted  losses  ascertained  to  he  such 

> 

How  were  they  so  asc 

ertained? 

Forms  and  Instructions 


349 


(6)  Depreciation:  The  amount  deductible  on  account  of  deprecia- 
tion is  an  amount  which  fairly  measures  the  deterioration  during  the 
year  in  the  value  of  physical  property  by  reason  of  use,  wear  and 
tear,  and  such  amount  should  be  determined  upon  the  basis  of  the 
cost  of  the  property  and  the  probable  number  of  years  constituting 
its  life.  Stocks,  bonds,  and  like  securities  are  not  subject  to  wear 
and  tear  within  the  meaning  of  the  law,  and  any  shrinkage  in  their 
value  due  to  fluctuations  in  the  market  is  not  deductible  either  as 
depreciation  or  loss. 

Depreciation  computed  on  total  invoice  value  of  merchandise  in 
stock  is  not  an  allowable  deduction.  However,  the  extent  of  shrink- 
age in  value  below  invoice  cost  of  certain  articles  of  merchandise  in 
stock,  determined  upon  the  individual  articles  affected,  may  be  taken 
and  should  be  reflected  in  the  value  of  merchandise  inventory  shown 
in  the  supplementary  statement  3  (a). 


Kind  of  Property 

Its  Cost 

Probable  Life 
After  Acquire- 
ment 

Amount  of  Depreciation 

This  Year 

Previous  Years] 

S 

s 

t 

. 

Totals.. 

S 

$ 

$ 

If  buildings,  state  kind  of  construction. 

(c)  Depletion  applies  to  the  wasting  of  natural  deposits  and  con- 
templates a  deduction  to  return  to  the  corporation  the  cost  of  or 
capital  invested  in  such  deposits,  provided  such  deduction  must  not 
exceed  5  per  cent  of  the  gross  value  at  the  mine  (or  well)  of  the  out- 
put of  the  year. 

"DEPLETION." 


•Kind  of 

tits  Cost 

Gross  Value  at 

Mine  of 
Output  for  Year 

Amount  of  Depletion 

Property- 

This  Year 

All  Years  to  Date 

$ 

$ 

S 

$ 

*Coal,  iron  ore,  copper,  oil,  or  gas. 

tCost  to  include  only  initial  purchase  price  plus  all  carrying  charges  not  deducted  from 
groBa  income  for  purpose  of  special  excise  and  income  tax. 


350 


Federal  Income  Tax 


6.  (a)  Interest  Deductible: 

The  amount  of  interest  which  may  be  deducted  under  this  item  is 
the  amount  actually  accrued  (due  and  payable)  and  paid  within  the 
year  on  an  amount  of  bonded  or  other  indebtedness  not  in  excess  of 
the  paid-up  capital  stock  outstanding  at  the  close  of  the  year  plus 
one-half  of  the  interest-bearing  indebtedness  also  then  outstanding. 
Where  there  is  no  capital  stock  the  amount  of  interest  deductible  is 
the  amount  actually  paid  on  an  amount  of  indebtedness  not  in  excess, 
at  any  time  during  the  year,  of  the  capital  employed  in  the  business 
at  the  close  of  the  year. 

Interest  paid  on  mortgage  indebtedness,  assumed  or  unassumed,  on 
property  to  which  the  corporation  has  taken  or  is  taking  title,  or  in 
which  it  has  an  equity,  or  in  the  acquirement  of  which  the  mortgage 
was  considered  a  part  of  the  purchase  price,  should  be  reported  under 
this  item,  as  such  indebtedness  is  held  to  be  the  debt  of  the  corpora- 
tion. 

Interest  paid  in  lieu  of  rent  on  mortgage  indebtedness  secured  by 
property  which  the  corporation  occupies,  but  does  not  own,  or  have 
an  equity  in,  should  be  reported  under  item  4  (o).  Such  debt  is  the 
debt  of  the  property  and  not  of  the  corporation. 

Interest  paid  on  indebtedness  wholly  secured  by  collateral  the  sub- 
ject of  sale  in  the  ordinary  business  of  the  corporation  should  be 
reported  under  item  4  (n). 

INTEREST  PAYMENTS  ACTUALLY  MADE  DURING  YEAR. 
All  forms  of  indebtedness  upon  which  interest  was  paid  should  be  listed  here. 


Name  or  Kind  of 
Obligation 

Amount  of  Principal 

Rate  of 
Interest 

Amount  of 
Interest  Paid 

$.... 

$ 

Total 

*..- 

$ 

(ft)  Interest  Paid  on  Deposits:  Interest  paid  on  deposits  is  a 
proper  deduction  from  gross  income  under  this  item  in  case  of 
banks  and  banking  institutions  only. 

7.  (a)  Taxes — Federal  and  State: 

(6)  Taxes — Foreign:  Taxes  deductible  under  these  items  are  such 
taxes  actually  paid  within  the  year  as  are  imposed  by  either  the 
United  States  or  any  State  or  Territory  thereof,  or  by  the  Govern- 


Forms  and  Instructions  351 

ment  of  any  foreign  country,  not  including  taxes  for  local  benefits, 
nor  taxes  paid  by  corporations  pursuant  to  covenants  guaranteeing 
their  bonds  to  be  tax  free. 

A  reserve  for  taxes,  as  such,  is  not  deductible. 

Banks  paying  taxes  assessed  on  the  value  of  their  capital  stock 
outstanding  and  in  the  hands  of  their  stockholders  cannot  deduct 
the  same.  Such  taxes  are  a  liability  of  the  stockholders,  deductible 
from  the  dividends  of  such  stockholders. 

Where  sufficient  space  is  not  provided  for  the  entry  of  the  infor- 
mation required  in  the  "Supplementary  statement,"  lists  containing 
full  information  in  the  form  indicated  should  be  marked  in  accord- 
ance with  the  particular  item  and  attached  to  this  form. 


INSTRUCTIONS    TO    CORPORATIONS    WITH    RESPECT    TO 
MAKING    RETURNS    OF   ANNUAL   NET   INCOME. 


Washington,  D.  C,  December  8,  1915. 

The  officers  of  corporations  will  please  read  carefully  the  follow- 
ing instructions,  as  well  as  those  given  on  the  return  form  (1031), 
before  inserting  the  figures  in  either  the  return  proper  or  the  supple- 
mentary statement. 

Returns  must  be  filed  by  all  corporations  having  existence  during 
all  or  any  part  of  the  year,  and,  if  made  on  the  basis  of  a  calendar 
year,  must  be  filed  on  or  before  March  1 ;  if  on  the  basis  of  a  fiscal, 
other  than  the  calendar,  year  they  must  be  filed  on  or  before  the 
last  day  of  the  60-day  period  next  following  the  close  of  the  fiscal 
year. 

Dissolved  corporations,  making  return  on  the  basis  of  a  calendar 
year,  will  make  final  return  covering  the  period  from  January  1  to 
date  of  dissolution.  Dissolved  corporations  making  return  on  the 
basis  of  a  fiscal,  other  than  the  calendar,  year  will  make  a  final 
return  covering  the  period  from  the  beginning  of  the  fiscal  year  to 
the  date  of  dissolution.  Date  of  dissolution  in  either  case  must  be 
noted  on  the  face  of  the  return  in  red  ink. 

New  corporations  organized  during  the  year  must  make  return 
covering  the  period  from  date  of  organization  to  December  31,  unless 
the  collector  is  given  written  notice,  not  less  than  30  days  prior  to 
March  1,  designating  the  last  day  of  some  month,  other  than  Decem- 
ber, as  the  closing  date  of  the  fiscal  year.  In  this  event  a  return  will 
be  made  within  60  days  after  the  close  of  the  fiscal  year  designated, 
provided  the  period  from  date  of  organization  to  the  closing  date  of 
the  fiscal  year  does  not  exceed  12  months.  Further  instructions  will 
be  given  by  the  collector. 


352  Federal  Income  Tax 

Address  in  the  heading  must  show  where  books  are  kept  from 
which  return  is  prepared,  and  the  return  will  be  filed  in  the  district 
in  which  this  address  shows  the  books  to  be  kept. 

SUPPLEMENTARY  STATEMENT  MUST  BE  PREPARED  FIRST  AND  THE  TOTALS 
CARRIED  TO  THE  PROPER  SPACES  BEARING  SIMILAR  NUMBER  AND  LETTER 
IN  THE  RETURN  PROPER. 

Paid-up  capital  stock,  to  be  entered  under  item  1,  should  repre- 
sent total  par  value  of  paid-up  stock  issued,  both  common  and  pre- 
ferred, outstanding  at  the  close  of  the  period  covered  by  the  return. 
It  is  immaterial  whether  stock  is  paid  for  in  cash,  promissory  notes, 
or  other  assets.  When  stock  is  assessable  on  account  of  deferred 
payments  or  is  payable  in  installments,  the  amount  actually  paid  on 
such  shares  will  constitute  the  actual  paid-up  capital  stock  of  the 
corporation,  and  the  amount  so  actually  paid  in  will  be  entered  under 
this  item. 

Indebtedness,  to  be  entered  under  item  2,  should  embrace  all  out- 
standing interest-bearing  indebtedness  for  which  the  corporation  has 
acknowledged  liability,  in  the  form  of  mortgage,  note,  bond,  or  other 
paper,  said  paper  bearing  interest,  not  including  indebtedness  wholly 
secured  by  collateral  the  subject  of  sale  in  the  ordinary  business  of 
the  corporation.  Such  latter  indebtedness  should  be  included  under 
item  2  of  the  supplementary  statement,  at  the  lower  margin  of  the 
return  proper,  and  should  be  properly  explained. 

UROSS    INCOME. 

Banks  and  other  financial  institutions  will  include  as  Gross  Income 
the  total  revenue,  gains,  or  profits  from  all  sources,  as  shown  by  the 
entries  on  the  books  of  account. 

Manufacturing  corporations  will  ascertain  Gross  Income  from 
Operations  through  the  inventory  computation  (3a)  on  the  back  of 
the  form.  In  this  computation  "Sales"  should  represent  the  entire 
sales  during  the  year,  whether  for  cash  or  otherwise.  "Purchases" 
should  include  all  purchases  of  raw  material,  supplies,  etc.,  during 
the  same  period.  "Purchases"  will  not,  however,  include  any  ex- 
penses or  other  items  claimed  as  deductions  under  the  headings  4a 
to  7b,  inclusive.  (Purchases  of  equipment,  office  furniture,  fixtures, 
and  so  forth,  are  considered  to  be  capital  investments  and  are  not 
subject  to  deduction  as  purchases  or  expenses.)  Such  items  are  to 
be  charged  to  capital  account  and  are  susceptible  to  depreciation 
charge,  which  may  be  taken  in  the  return  if  such  account  is  set  up 
on  the  books  of  the  corporation  and  so  entered  on  the  books  as  to 
constitute  a  liability  against  the  assets  of  the  company.     "Inven- 


Forms  and  Instructions  353 

tories"  should  be  as  of  the  beginning  and  close  of  the  period  covered 
by  the  return  and  will  embrace  finished  and  unfinished  products, 
raw  materials,  supplies,  etc. 

Mercantile  corporations  will  ascertain  "Gross  Income  from  Opera- 
tions" in  the  same  manner  as  manufacturing  corporations,  except 
that  inventories  will  embrace  merchandise  or  stock  in  trade,  or  on 
hand,  at  the  beginning  and  close  of  the  period,  as  well  as  the  amount 
of  the  gross  sales  and  purchases  during  the  period. 

Other  corporations  will  include  as  gross  income  the  total  revenue 
derived  from  the  operation  and  management  of  the  business  and 
property  of  the  corporation,  together  with  all  amounts  of  income, 
gains,  or  profits  arising  or  accruing  from  all  other  sources,  as  shown 
by  the  books  of  account. 

DEDUCTIONS. 

Expenses,  general,  should  be  segregated  and  entered  under  the 
proper  heading  of  the  schedule  at  the  lower  left-hand  corner  of  the 
back  of  the  sheet.  The  schedule  will  not,  however,  include  any 
items  specifically  called  for  under  items  4b  to  7b,  inclusive,  nor  will 
the  schedule  include  any  items  that  have  been  taken  into  considera- 
tion in  the  inventory  computation  (3a)  when  ascertaining  the  "Gross 
Income  from  Operations." 

Line  1  should  embrace  the  expenses  of  nonproductive,  supervisory, 
executive  and  selling  labor,  commissions,  etc.,  not  including  salaries 
paid  to  officers. 

Line  2  should  include  light,  heat,  and  power  expense. 

Line  3  should  cover  ordinary  rentals. 

Line  4  may  include  incidental  repairs,  which  do  not  add  to  the 
value  or  appreciably  prolong  the  life  of  the  property,  or  which  do 
not  constitute  additions  and  betterments,  the  latter  being  properly 
chargeable  to  property  account. 

Line  5  should  not  be  used  unless  the  corporation  is  paying  interest 
on  indebtedness  wholly  secured  by  collateral,  which  particular  collat- 
eral securing  the  debt  is  the  subject  of  sale  in  the  ordinary  business 
of  the  corporation. 

Line  6  should  show  total  salaries  paid  to  officers,  including  those 
stated  in  detail  under  item  (4  (a)  8,  which  item,  in  detail,  is  re- 
quired for  information  only. 

Line  7,  "Other  expenditures,"  may  include  such  expenses  as  are  not 
accounted  for  in  any  of  the  above  items,  and  should  be  classified 
under  three  or  four  general  heads,  as  indicated. 

Losses,  to  be  deductible,  must  be  definite,  absolute,  actually  sus- 
tained during  the  period  and  charged  off  on  the  books,  and  will  not 
include  shrinkage  in  the  value  of  securities  or  other  assets.  Appro- 
priate explanation  should  be  made  in  the  space  provided  on  the  back 

23 


35+  Federal  Income  Tax 

of  the  form  of  each  loss  for  which  deduction  is  claimed.  Decrease 
in  value  of  stock  inventory  is  not  a  loss  contemplated  to  be  treated 
here,  but  will  be  taken  into  account  in  the  inventory  in  the  compu- 
tation under  3  (a)  of  the  supplementary  statement.  Bad  debts 
should  be  listed  and  date  of  charging  off  stated  as  to  each.  If  the 
space  provided  is  not  sufficient  to  make  such  list,  use  additional 
paper  and  securely  attach  same  to  the  return.  Bad  debts  are  not 
deductible  as  a  loss  unless  at  some  time,  either  through  inventory 
or  otherwise,  they  shall  have  been  taken  up  as  income. 

Depreciation,  deducted  under  item  5  (b),  should  be  appropriately 
explained.  If  depreciation  is  claimed  on  more  than  one  class  of 
property  at  different  rates,  the  cost  of  each  separate  class  will  be 
stated,  with  its  corresponding  probable  life,  the  amount  charged  off 
this  and  prior  years.  The  amount  deducted  must  appear  on  the 
books  of  the  corporation  as  a  liability  against  the  assets,  and  must 
be  reflected  in  the  annual  "Balance  Sheet."  Depreciation  on  merchan- 
dise or  stock  in  trade  must  not  be  deducted  here,  but  should  be  taken 
into  consideration  through  the  inventory  at  the  close  of  the  year  in 
computing  3  (a).  Deduction  as  depreciation  cannot  be  taken  for 
such  wear  and  tear  as  has  been  made  good  by  repairs,  deducted  in 
item  4  (a).  The  depreciation  deduction  cannot  be  cumulative,  but 
will  consist  of  an  amount  measuring  the  loss  due  to  use,  wear  and 
tear  occurring  during  the  period  for  which  the  return  is  made. 

Interest  deductions  should  include  only  the  interest  actually  ac- 
crued and  paid  during  the  period,  and  cannot  exceed  the  amount  set 
out  in  the  instructions  given  under  item  6  (a)  of  the  supplementary 
statement.  Appropriate  explanation  must  be  made  in  the  space  pro- 
vided therefor.  If  space  is  not  sufficient,  additional  paper  should  be 
used  and  attached  to  return.  Interest  cannot  be  deducted  in  excess 
of  the  amount  actually  paid,  at  the  contract  rate,  upon  a  principal 
measured  by  the  sum  of  the  paid-up  capital  stock  plus  one-half  of 
the  interest-bearing  indebtedness  at  the  close  of  the  period. 

W.  H.  Osbobn, 
Commissioner  of  Internal  Revenue. 


Forms  and  Instructions  355 


(Form  1040  (Revised). 


RETURN  OP  ANNUAL   NET   INCOME   OF   INDIVIDUALS. 

(As  provided  by  Act  of  Congress,  approved  October  3,  1913.) 


Income  Received  or  Accbued  During  the  Year  Ended  Dec.  31,  191 
Filed  by  (or  for) of 


(Street  and  number.) 
(pVst-office  address.")"""  "  (State.) 

COMPLETE  ANSWERS  SHOULD  BE  GIVEN  TO  THE  FOLLOWING  QUESTIONS. 

Did  you  render  a  return  of  income  for  the  preceding  year? 

If  so,  in  what  Internal  Revenue  District  was  it  filed? 

Were  you  single  or  married  with  wife  or  husband  living  with  you 
on   December   31   of  the  year   for  which   this   return   is   rendered? 


If  married,  give  full  name  of  wife  or  husband 

Has  your  wife  or  husband  income  from  sources  independent  of 

your  own? 

Have  you  included  your  wife's  or  husband's  income  in  this  return? 


356 


Federal  Income  Tax 


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Forms  and  Instructions 


357 


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or  is  not  to  be  paid  at  the  source. 

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a     i       i       i       i 

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A 

Income  on  which  the  tax  has  been  paid  or  is  to 
be  paid  at  the  source. 

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o     :        ;        :                         : 

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fa           1                 I                 I                 1                       t                 i 

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3     .        .        i        i           •• 

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g     :       :       :       :         :       : 

a     i       j       j       j 

Description  of  Income 

Note.— If  husband  and  wife  render  separate  re- 
turns, only  the  income  and  deductions  of  the 
husband  or  wife  (as  the  case  may  be)  who 
renders  this  return  shall  be  included  herein; 
but  if  separate  returns  are  not  rendered  by 
both  husband  and  wife  the  income  and  de- 
ductions of  both  husband  and  wife  shall  be 
included  separately  as  provided  on  this  form. 

Total  Amount  Derived  from — 

12.  Salaries  and  wages 

Wife's  income 

13.  Professions  and  vocations... 

Wife's  income 

14.  Business,  trade,  commerce,  or  sales,  or  deal- 

ings in  property,  whether  real  or  personal. 

Wife's  income 

Forms  and  Instructions 


359 


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360 


Federal  Income  Tax 


B 

Income  on  which  the  tax  has  NOT  been  paid 
or  is  not  to  be  paid  at  the  source. 

3       i      i       :      i 

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Income  on  which  the  tax  has  been  paid  or  is  to 
be  paid  at  the  source. 

n             i             i             i             i 

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Description  of  Income 

Note. — If  husband  and  wife  render  separate  re- 
turns, only  the  income  and  deductions  of  the 
husband  or  wife  (as  the  case  may  be)  who 
renders  this  return  shall  be  included  herein; 
but  if  separate  returns  are  not  rendered  by 
both  husband  and  wife  the  income  and  de- 
ductions of  both  husband  and  wife  shall  be 
included  separately  as  provided  on  thiB  f  orm. 

Total  Amount  Derived  from— 

21.    Royalties  from   mines,   oil  wells,  patents, 
franchises,  or  other  legalized  privileges 

Wife's  income 

Note. — State  here  sources  from  which 
income  entered  on  line  22  is  received 
and  amount  received  from  each. 

23.              Totals    (Note.— Enter  total  of  Col- 
umn A  on  line  5) 

FOBMS    AND    InSTBUOTIONS 


361 


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362  Federal  Income  Tax 


GENERAL   DEDUCTIONS. 


Note.— Claims  for  deductions  cannot  be  allowed  unless  the  Infor- 
mation required  below  is  clearly  set  forth. 


29.    The  amount  of  necessary  expenses 
actually  paid  within  the  calendar 
year,    for   which    the   return   is 
made,  in  carrying  on  any  individ- 
ual business.     There  must  not  be 
included    under   this   head   per- 
sonal, living,  or  family  expenses, 
business  expenses  of  partnerships, 
or  cost  of  merchandise.  Amounts 
paid  for  permanent  improvement 
or  betterment  of  property  are  not 

Mi 

Uion 

a 

Th 

ousa 

lulu 

11 

indr 

2ds 

Cents 

Note. — State  on  the  follow- 
ing  lines   the   principal   busi- 
nesses in  which  the  above  ex- 
penses were  incurred. 

30.    All  interest  paid  within  the  year 
on  personal  indebtedness  of  tax- 

31.    All  National,  State,  county,  school, 
and  municipal  taxes  paid  within 
the  year  (not  including  those  as- 

32.    Losses  actually  sustained  during 
the  year  incurred  in  trade  or  aris- 
ing from  fires,  Btorms,  or  ship- 
wreck, and  not  compensated  by 

Note. — State  (a)  of  what  the 
loss  consisted,  (b)  when  it  was 
actually  sustained,  and  (c)  how 
it  was  determined  to  be  a  loss. 

Forms  and  Instructions 


363 


33.    DebtB  past  due  which  have  been 
actually  ascertained  to  be  worth- 
less and  which  have  been  charged 

S 

Note. — State  (a)  of  what  the 
debts  consisted,  (b)  when  they 
were  created,  (c)  when  they  be- 
oame  due,  and  (d)  how  they 
were  actually  determined  to  be 
worthless. 

34.    Amount  representing  a  reasonable 
allowance    for    the    exhaustion, 
wear  and  tear  of  property  arisina 
out  of  its  use  or  employment  in 
business.     No  deduction  shall  be 
made   for  any   amount    of    ex- 
pense  of  restoring   property   or 
making    good    the     exhaustion 
thereof  for  which  a  deduction  is 

Note. — State   (a)  what  the 
property  was  on  which  depre- 
ciation is  taken  (if  buildings, 
state   when  erected,    of   what 
material  constructed,  and  value 
of  same,  as  of  January  1  of  the 
calendar  year  for  which  this 
return   is   rendered),    and    (6) 
what  percentage  of  deprecia- 
tion is  claimed. 

35.    Amount  allowed  to  cover  depletion 
in  case  of  mines  and  oil  wells,  not 
to  exceed  5  per  cent  of  the  gross 
value  at  the  mine  or  well  of  the 
output  for  the  calendar  year  for 

Note. — State     (a)     cost    of 
mine  or  well,  (6)   gross  value 
at  the  mine  or  well  of  the  out- 
put for  the  calendar  year  for 
which  this  return  is  rendered, 
and  (c)  what  percentage  of  de- 
pletion is  claimed. 

36.               Total   "General    Deduc- 
tions" (to  be  entered  on 
line  2) 

$— . 

Note. — If  space  is  insufficient  for  answering  any  questions,  attach  a  supplemental  sheet  to 
this  return. 


364  Federal  Income  Tax 

AFFIDAVIT    TO    BE    EXECUTED    BY    INDIVIDUAL    MAKING 
HIS  OWN  BETUBN. 

I  swear  (or  affirm)  that  the  foregoing  return,  to  the  best  of  my 
knowledge  and  belief,  contains  a  true  and  complete  statement  of 
all  taxable  gains,  profits,  and  income  received  by  or  accrued  to  me 
during  the  year  for  which  the  return  is  made,  and  that  I  am  enti- 
tled to  all  the  deductions  and  exemptions  entered  or  claimed  therein 
under  the  Federal  Income  Tax  Law  of  October  3,  1913. 


(Signature  of  individual.) 

Sworn  to  and  subscribed  before  me  this  day  of ,  191.... 


[SEAL.] 

(Official  capacity.) 


AFFIDAVIT    TO   BE    EXECUTED    BY    DULY    AUTHOBIZED    AGENT    MAKING 
RETUBN    FOB    INDIVIDUAL. 

I  swear  (or  affirm)  that  I  have  sufficient  knowledge  of  the  affairs 

and  property  of to  enable  me  to  make  a 

full  and  complete  return  of  the  taxable  income  thereof,  and  that  the 
foregoing  return,  to  the  best  of  my  knowledge  and  belief,  contains 
a  true  and  complete  statement  of  all  the  taxable  gains,  profits,  and  in- 
come received  by  or  accrued  to  said  individual  during  the  year  for 
which  the  return  is  made,  and  that  the  said  individual  is  entitled 
under  the  Federal  Income  Tax  Law  of  October  3,  1913,  to  all  the 
deductions  and  exemptions  entered  or  claimed  therein,  and  that  I 
am  authorized  to  make  this  return  for  the  following  reasons: 


(Signature  of  agent.) 


(Po3t-office  address  of  agent.) 

Sworn  to  and  subscribed  before  me  this day  of  ,  191.. 


[SEAL.] 

(Official  capacity.) 


Foems  and  Insteuotions  365 

instructions. 

1.  This  return  shall  be  made  by  every  citizen  of  the  United  States, 
whether  residing  at  home  or  abroad,  and  by  every  person  residing 
in  the  United  States,  though  not  a  citizen  thereof,  having  a  net  in- 
come of  $3,000,  or  over,  for  the  taxable  year. 

2.  This  return  shall  be  made  by  every  nonresident  alien  deriving 
any  net  income  from  property  owned  and  business,  trade,  or  pro- 
fession carried  on  in  the  United  States  by  him.  No  specific  exemp- 
tion is  allowed  nonresident  aliens. 

3.  When  an  individual  by  reason  of  minority,  sickness,  or  other 
disability,  or  absence  from  the  United  States,  is  unable  to  make  his 
own  return,  it  may  be  made  for  him  by  his  duly  authorized  repre- 
sentative. 

4.  This  return  should  be  filed  with  the  Collector  of  Internal  Reve- 
nue for  the  district  in  which  the  individual  resides.  In  case  the 
person  resides  in  a  foreign  country,  then  with  the  collector  for  the 
district  in  which  his  principal  business  is  carried  on  in  the  United 
States. 

5.  When  the  return  is  not  filed  within  the  required  time  by  rea- 
son of  sickness  or  absence  of  the  individual,  an  extension  of  time, 
not  exceeding  30  days  from  March  1,  within  which  to  file  such 
return  may  be  granted  by  the  collector,  provided  a  written  appli- 
cation therefor  is  made  by  the  individual  within  the  period  for 
which  such  extension  is  desired. 

6.  This  return,  properly  filled  out,  must  be  made  under  oath  or 
affirmation.  Affidavits  may  be  made  before  any  officer  authorized  by 
law  to  administer  oaths. 

7.  An  unmarried  individual  or  married  individual  not  living  with 
husband  or  wife  shall  be  allowed  an  exemption  of  $3,000.  When 
husband  and  wife  live  together  they  shall  be  allowed  jointly  a  total 
exemption  of  only  $4,000  on  their  aggregate  income.  Either  hus- 
band or  wife  may  make,  sign,  and  verify  a  return  of  their  joint  in- 
come. Where  husband  and  wife  have  separate  incomes  they  make  a 
joint  return  of  such  separate  income,  both  subscribing  to  the  return, 
or  they  may  make  separate  returns  of  their  respective  incomes,  but 
in  no  case  shall  they  claim  or  be  allowed  more  than  $4,000  exemption 
on  their  aggregate  incomes. 

8.  Amounts  charged  on  line  29  for  restoring  property  or  making 
good  the  exhaustion  thereof  from  its  use  in  business,  together  with 
the  amount  claimed  for  depreciation  on  line  34,  must  not  exceed  the 
deterioration  of  the  property  in  one  year. 


PART  VII 

STATISTICS 

(See  Frontispiece  Chart) 


Receipts  by  States  from  all  sources,  receipts  by  years  all 
sources,  Corporation  and  Personal  Income  Tax  figures  tabu- 
lated. 


STATISTICS 


RECEIPTS  BY  STATES  AND  TERRITORIES  DURING  THE  LAST  FISCAL  YEAR. 

Aggregate  collection  of  internal  revenue,  by  States  and  Territories  of  the   United  States  and 
the  Philippine  Islands,  during  the  fiscal  year  ended  June  SO,  1915. 


State,  Territory,  etc. 

Aggregate 
Collections 

State,  Territory,  etc. 

Aggregate 
Collections 

$      661,217.64 

31,699.46 

208,912.05 

394,536.43 

13,129,026.52 

1,509,773.16 

3,222,249.67 

722,298.66 

1,438,62S.75 

1,562,425.02 

1,041,349.35 

434,582.62 

208,004.69 

56,242,546.12 

25,761,193.45 

2,621,308.38 

1,101,868.00 

33,653,848.21 

8,604,940.00 

718,084.03 

7,766,490.56 

12,094,625.11 

11,085,043.07 

5,195,257.80 

223,965 .84 

14,874,845.68 

752,908.96 

2,878,265.06 

$        171,095.06 

783,234  45 

15.358,014.08 

142, 593  ,0S 

76,271,908.24 

13,651,937.38 

261,610.05 

Ohio- 

27,424,294.20 
729,323.56 

1,160,496.09 

37,611,791.32 

624,793.60 

1,797,903.53 

453,396.66 
359,551.25 

2,375,418.27 
2,841,336.60 

Utah 

576,720.59 

276,446.50 

8,642  35S.70 

2,329,311 .84 

1,969,473.72 

Wisconsin 

11,390,243.87 

133,509.79 

Philippine  Islands 

Alaska  (special  fund)1 

Total 

193,302.08 

11,065.06 

415,681,023.86 

'Income  tax  collected  on  railroads  in  Alaska. 

Note. — Alabama  and  Mississippi  comprise  the  district  of  Alabama;  Colorado  and  Wy- 
oming, the  district  of  Colorado;  Connecticut  and  Rhode  Island,  the  district  of  Connec- 
ticut; Maryland,  Delaware,  District  of  Columbia,  and  the  counties  of  Accomac  and 
Northampton,  Va.,  the  district  of  Maryland;  Montana,  Idaho,  and  Utah,  the  district  of 
Montana;  New  Hampshire,  Maine,  and  Vermont,  the  district  of  New  Hampshire;  New 
Mexico  and  Arizona,  the  district  of  New  Mexico;  North  Dakota  and  South  Dakota, 
the  district  of  North  and  South  Dakota;  Washington  and  Alaska,  the  district  of  Washing- 
ton; and  Nevada  forms  a  part  of  the  First  district  of  California. 

The  collections  credited  to  Porto  Rico  were  returned  from  the  following  districts,  viz.: 

First  district  of  New  York.. $  114,048.65 

Second  district  of  New  York __ 510,744.95 

Total 624,793.60 


24 


370 


Federal  Income  Tax 


Statement  showing  the  total  internal-revenue  receipts  in  the  United  States  for  each  fiscal  year 
from  September  I,  1861,  to  June  SO,  WIS 


1863 $41,003,192.93 

1864 116,965,578.26 

1865 210,855,864.53 

1866 310,120,448.13 

1867 265,064,938.43 

1868 190,374,925.59 

1869 159,124,126.86 

1870 184,302,828.34 

1871 143,198,322.10 

1872 130,890,096.90 

1873 113,504,012.80 

1874 102,191,016.98 

1875 110,071,515.00 

1876 116,768,096.22 

1877. 118,549,230.25 

1878 110,654,163.37 

1879 113,449,621.38 

1880. 123,981,916.10 

1881 135,229,912.30 

1882 146,523,273.72 

1883. _  144,553,344.86 

1884.. 121,590,039.83 

1885.. 112,421,121.07 

1886 116,902,869.44 

1887 118,837,301 .06 

1888 124,326,475.32 

1889 130,894,434.20 

1890 142,594,696.57 


1891 $146,035,415.97 

1892. 153,857,544.35 

1893... 161,004,989.67 

1894 147,168,449.70 

1895 143,246,077.75 

1896. 146,830,615.66 

1S97 146,619,593.47 

1898 170,866,819.36 

1899.... 273,484,573.44 

1900 295,316,107.57 

1901 306.871,669.42 

1902 271.867,990.25 

1903.... 230.740,925.22 

1904 232,903,781.06 

1905 234,187,976.37 

1906 249,102,738.00 

1907 269,664,022.85 

1908 _ 251,665,950.04 

1909 246,212,719.22 

1910 289,957,220.16 

1911 322,526,299.73 

1912. 321,615,894.69 

1913. 344,424,453.85 

1914 380,008,893.96 

1915 415,681,023.86 

Total 10,106,805,108.16 


Statistics 


371 


CORPORATION  AND  INDIVIDUAL  INCOME  TAX. 

Supplemental  statement  showing  by  States  and  Territories  the  receipts  under  act  of  Oct.  3, 
1913,  during  the  fiscal  year  ended  June  SO,  1915. 


States,  Terri- 
tories, etc. 


Alabama 

Alaska 

Arizona 

Arkansas 

California 

Colorado 

Connecticut ... 

Delaware 

Dist.  of  Col— 

Florida 

Georgia 

Hawaii. 

Idaho. .- 

Illinois _- 

Indiana 

Iowa 

Kansas 

Kentucky 

Louisiana 

Maine 

Maryland 

Massachusetts 

Michigan 

Minnesota 

Mississippi 

Missouri 

Montana 


Corpora- 
tion In- 
come Tax 


177,127.39 
4,412.49 

74,935.76 

89,149.52 
620,250.50 
333, 683 .28 
634,804.71 
143,955.10 
134,767.04 
108,141.60 
320,617.52 
198,610.97 

71,202.56 
983,527.31 
644, 147  .38 
469,173.05 
460,043.69 
467,638.45 
316,364.74 
325,168.99 
385,539.58 
853,057.41 
379,478.99 
202,379.50 

73,516.09 
099,384.38 
134,651.53 


Individual 

Income 

Tax 


$    84,633.40 

4,556.11 

51,624.12 

38,177.09 

1,240,501.03 

226,735.74 

648,891.26 

138,835.94 

378,673.72 

121,368.22 

119,983.61 

45,211.04 

24,567.89 

2,670,630.34 

345,653.92 

264,315.64 

94,975.59 

163,191.46 

209,813.20 

150.094.51 

636,340.03 

2,683,084.53 

1,533,829.14 

581,949.32 

34,664.57 

934,139.02 

51,184.39 


States,  Terri- 
tories, etc. 


Nebraska 

Nevada 

New  Hampsh. 
New  Jersey.. . 
New  Mexico  .- 

New  York 

North  Caro... 
North  Dakota 

Ohio 

Oklahoma 

Oregon ... 

Pennsylvania- 
Rhode  Island. 
South  Caro.  .. 
South  Dakota 

Tennessee 

Texas 

Utah 

Vermont 

Virginia- 

Washington.  _- 
West  Virginia- 
Wisconsin 

Wyoming 

Total . 


Corpora-        Individual 
tion  In-  Income 

come  Tax     I         Tax 


$  232, 

51 

96 

1,395, 

37 

10,221, 

257 

71, 

2,538 

273 

184 

4,725 

278, 

118, 

58, 

244, 

622, 

216, 

53, 

430, 

316, 

357, 

602, 

54, 


638 .07 
843.57 
944.33 
098 .46 
240.58 
206 .65 
825  .38 
340 .70 
058 .60 
203.26 
435 .06 
139.26 
658.26 
032 .23 
966.15 
305 .05 
646.16 
234 .83 
645  .86 
379.24 
322  .33 
614.85 
876.39 
146.91 


$    128 

31 

71, 

1,278 

16 

17,417, 

123 

26 

1,489 

133, 

121 

4,642 

432 

43 

15 

165 

425 

44 

141 

197 

198 

139 

272 

12 


735.25 
246 .39 
023.29 
169 .92 
278 .53 
537.60 
553 .96 
155  .98 
401.11 
685.76 
305  .87 
557 .08 
453 .37 
369 .72 
071 .31 
904.45 
631 .57 
975 .43 
428 .77 
: 559 .27 
579.39 
188  .47 
476.09 
248.68 


39,144,531.71  '  41,046,162.09 


Note. — The  receipts  during  the  fiscal  year  ended  June  30,  1914,  were  as  follows: 

Corporation  excise  and  income  taxes $43,127,739.89 

Individual  income  tax  (10  months) 28,253,534.85 

Total _ _ 71,381,274.74 


372 


Federal  Income  Tax 


CORPORATION  INCOME  TAX  DIVISION. 

Statement  showing  number  of  returns  received,  number  of  returns  showing  tax  liability,  and  amount  0/  tax 
assessed  on  the  basis  of  returns  filed  pursuant  to  the  requirements  of  the  acts  of  Aug.  6,  1919,  and  Oct. 
S,  191S,  by  districts,  during  the  year  ended  June  SO,  1915. 


District 


Alabama 

Arkansas 

First  California 

Sixth  California.. -_. 

Colorado 

Connecticut 

Florida 

Georgia 

Hawaii 

Firet  Illinois 

Fifth  Illinois 

Eighth  Illinois.-- 

Thirteenth  Illinois. 

Sixth  Indiana 

Seventh  Indiana 

Third  Iowa— 

Kansas- 

Second  Kentucky 

Fifth  Kentucky 

Sixth  Kentucky 

Seventh  Kentucky 

Eighth  Kentucky 

Louisiana 

Maryland 

Third  Massachusetts 

First  Michigan 

Fourth  Michigan— 

Minnesota 

First  Missouri- 

Sixth  Missouri 

Montana 

Nebraska 

New  Hampshire 

First  New  Jersey 

Fifth  New  Jersey 

New  Mexico 

First  New  York 

Second  New  York 

Third  New  York 

Fourteenth  New  York 

Twenty-first  New  York 

Twenty -eighth  New  York... 

Fourth  North  Carolina 

Fifth  North  Carolina 

North  and  South  Dakota... 

First  Ohio 

Tenth  Ohio 

Eleventh  Ohio 

Eighteenth  Ohio 

Oklahoma 

Oregon _ 

First  Pennsylvania 

Ninth  Pennsylvania 

Twelfth  Pennsylvania1 

Twenty-third  Pennsylvania 

South  Carolina — 

Tennessee 

Third  Texas. 

Second  Virginia 

Sixth  Virginia 

Washington 

West  Virginia 

First  Wisconsin 

Second  Wisconsin 

Totals.— 


Returns 

Krrriv  I'.l 


3,104 
2,363 

12,207 
8,102 
9,114 
3,816 
2,693 
4,763 
564 

16,057 
1,059 
2,788 
2,156 
5,399 
2,449 
8,142 
4,346 
1,251 
1,917 
477 
899 
671 
3,772 
5,781 
7,017 
5,754 
3,326 
8,828 
8,004 
5,665 
3,937 
4,684 
4,577 
2,516 
4,319 
1.941 
5,631 

12,183 
4.875 
5,076 
3.398 
6,260 
2,277 
2,322 
4,458 
3,410 
3,037 
3,171 
6,346 
5,839 
4,854 
6,936 
3,603 
83 
7,222 
2,075 
4,323 
8,513 
2,896 
2,039 
8,504 
4,647 
6,500 
4,459 


299,445 


Taxable 
Returns 


2,591 
1,570 
6,040 
3,091 
3,453 
3,229 
1,412 
3,009 

379 
7,644 

640 
1,818 
1,250 
3,497 
1,521 
5,342 
3,070 

754 
1,151 

298 

515 

396 
2,014 
3,058 
6,325 
3,411 
1,813 
5,424 
4,187 
3,583 
3,724 
3,084 
3,058 
1,326 
3,626 

854 
2.608 
5,859 
4,310 
2,459 
1,982 
3,251 
1,590 
1,407 
3,182 
2,061 
1,953 
1,851 
4,290 
2,729 
2,073 
3,799 
2,607 
47 
4,095 
1,532 
2,594 
5,071 
1,531 
1,277 
3,490 
2,485 
3,270 
2,645 


Corporation 

Income 

Tax 


$  196 
83 

1,178 
432 
389 
819 
103 
288 
198 

3,222 

129 

130 

95 

492 

117 

403 

232 

31 

235 

20 

37 

19 

296 

616 

1,674 

1,023 
257 

1,199 
705 
345 
443 
224 
398 
240 

1,049 
130 
425 

6,342 

1,587 
467 
290 
639 
76 
133 
124 
472 
371 
197 

1,095 
240 
146 

2,149 

553 

19 

1,806 
81 
225 
584 
262 
142 
317 
307 
445 
136 


751 .55 
073  .47 
998.51 
701.22 

391 .96 
245 .46 
217.88 
004.16 
482 .62 
951 .30 

103 .32 

415 .97 
305.11 
981 .35 
805  .42 

370 .96 
698 .78 
180 .48 
057  .07 
706  .59 
612 .42 
285 .27 
749 .57 
311.23 
496.16 
096.26 
097  .41 
714.78 
345 .05 
195 .61 
910.76 
342 .68 
089.11 
393.91 

928 .97 
444.51 
093 .80 
964.89 
441 .64 
270.56 

942 .34 
347 .22 
257.22 
129.11 
371 .01 

763 .33 
252 .03 
150.20 
438.13 
628 .77 
410.08 
SSS.49 
590.85 
092  .62 
068 .SO 
670.75 
627 .60 
747  .95 
316.09 
161 .00 
511.96 
595 .93 
314.87 

891 .35 


174,205    37,106,395.47    1,743,074.08 


Special 

Excise 

Tax 


%  32,995.44 
3,416.14 
69,973.47 
31,061.56 
19,243.20 
104,117.80 
3,015.79 
2S.462.02 


35,291.26 

11,826.54 

14,628.49 

2,046.57 

28,661.68 

818.37 

33,273.31 

1,415.01 

6,718.95 

21,668.29 

3,630.00 

1,273.01 


63, 60S  .46 

17,809.96 

92,781.71 

21,583.44 

12,815.20 

31,003.90 

19,999.52 

17,058.15 

22,130.34 

1,215.90 

13,750.48 

4,472.61 

109,342.73 

1,921.41 

9,902.67 

196,078.01 

37,526.01 

59,664.17 

2,861.56 

3,131.35 

7,729.97 

24,280.26 

2,438.46 

30,885.76 

4,197.77 

7,345.77 

57,553.63 

19.64S.67 

29,693.29 

123,147.89 

38,705.00 

19,834.92 

45,761.64 

5,945.62 

18,701.80 

44,447.69 

23,465.51 

4,961.05 

3,663.07 

8,235.13 

15,975.12 

14,361.58 


50  Per  Cent 
and  100  Per 
Cent  Addi- 
tional Tax 


5,267.53 

406.28 

827 .46 

3,750.53 

1,476.85 

653  .94 

1,199.61 

3,327.33 

172.45 

19,338.54 

365 .31 

193 .82 

766.60 

2,205.65 

1,039.62 

3,383.49 

511 .69 

333 .54 

23.50 

8.24 

421 .68 

315.29 

2,446.02 

802 .63 

6,455.83 

2,327.42 

526 .65 

2,718.27 

3,314.93 

1,421.75 

6,337.70 

126 .9S 

4,652.31 

705  .73 

3,848.87 

456 .05 

938 .89 

3,316.03 

8,820.27 

851 .34 

544 .43 
620.42 
464 .81 
755 .54 

2,297.90 

878 .41 

1,611.86 

7,773.23 

735 .88 

715.19 

604.73 

1,738.43 

2,606.66 

480 .44 
6,002.33 

513.30 

456.52 

5,009.33 

1,274.03 

1,126.96 

1,809.10 

2,852.22 

322 .80 

231 .44 


137,482.73 


Total 


%  235,014.52 
86,895.89 

1,249,799.44 
467,513.31 
410,112.01 
924,017.20 
107,433.28 
319,793.51 
198, 655 .07 

3,277,581.10 

141,295.10 

145,238.28 

98,118.28 

523,848.68 

119,663.41 

440,027.76 

234,625.48 

38, 232 .97 

256,643.86 

24,344.83 

39,307.11 

19,600.56 

362,804.05 

634,923.87 

1,773,733.70 

1,047,007.12 
270,439.26 

1,233,436.95 
728,659.50 
363,675.51 
472,378.80 
225,655.56 
416,491.90 
245,572.25 

1,163,120.57 
132,821.97 
435,935.36 

6,542,358.98 

1,633,787.92 
527,786.07 
294,348.33 
643,098.99 
84,452.00 
158,164.91 
129,107.37 
504,527.50 
377,061.66 
212, 269 .20 

1,153,727.64 
260,992.63 
176,708.10 

2,274,774.81 
594.902.51 
39,407.98 

1,857,832.77 
88,129.67 
244,785.92 
634,204.97 
287,055.68 
148,249.01 
322,984.13 
318,683.28 
461,612.79 
151,484.37 


38,986,952.28 


'Reestablished  May  1,  1915. 


Statistics 


373 


Statement  showing  number  of  corporation  returns  received,  number  of  returns  showing  tax  liability,  and 
amount  of  tax  assessed  on  the  bsais  of  returns  filed  pursuant  to  the  requirements  of  the  acts  of  Aug.  5. 
1809,  and  Oct.  8,  1918,  by  States,  during  the  year  ended  June  SO,  1915. 


States  and  Territories 


Alabama... 

Alaska 

Arizona.  _ 

Arkansas 

California 

Colorado 

Connecticut 

Delaware 

District  of  Columbia- 
Florida. 

Georgia 

Hawaii 

Idaho _ 

Illinois 

Indiana 

Iowa 

Kansas 

Kentucky 

Louisiana — 

Maine 

Maryland 

Massachusetts 

Michigan 

Minnesota. 

Mississippi.. _- 

Missouri.,. __ 

Montana 

Nebraska 

Nevada . 

New  Hampshire 

New  Jersey 

New  Mexico 

New  York 

North  Carolina 

North  Dakota _. 

Ohio - 

Oklahoma 

Oregon 

Pennsylvania.. _ 

Rhode  Island 

South  Carolina 

South  Dakota 

Tennessee 

Texas. 

Utah.. 

Vermont 

Virginia _ __- 

Washington 

West  Virginia -_. 

Wisconsin 

Wyoming 


Totals—. 299,445 


Returns 

Taxable 

Received 

Returns 

1,912 

1,576 

157 

82 

1,026 

346 

2,363 

1,570 

19,939 

8,816 

7,803 

2,842 

2,667 

2,268 

843 

448 

966 

564 

2,693 

1,412 

4,763 

3,009 

564 

379 

968 

878 

22,060 

11,352 

7,848 

5,018 

8,142 

5,342 

4,346 

3,070 

5,215 

3,114 

3,772 

2,014 

2,824 

1,829 

3,928 

2,016 

7,017 

6,325 

9,080 

5,224 

8,828 

5,424 

1,192 

1,015 

13,669 

7,770 

1,551 

1,492 

4,684 

3.0S4 

370 

315 

940 

666 

6,835 

4,952 

915 

50S 

37,423 

20,469 

4,599 

2.997 

2,353 

1,714 

16,014 

10,155 

5,839 

2,729 

4.854 

2,073 

17,844 

10,548 

1.149 

961 

2,075 

1,532 

2,105 

1,468 

4,323 

2,594 

8,513 

5,071 

1,418 

1,354 

813 

563 

4,979 

2,838 

8,347 

3,403 

4.647 

2,485 

10.959 

5,915 

1,311 

611 

299.445 

174,205 

Corporation 

Income 

Tax 


. 


%  146,923.54 

6,258.35 

67,325.98 

83,073.47 

1,571,865.97 

337,859.55 

562,760.12 

117,693.84 

123,856.73 

103,217.88 

288,004.16 

198,482.62 

87,164.78 

3,577,775.70 

610,786.77 

403,370.96 

232.698.78 

343,841.83 

296,749.57 

272,129.65 

372,923.65 

1,674,496.16 

1,280,193.67 

1,199.714.78 

49,828.01 

1,050.540.66 

130,306.22 

224,342.68 

39,833.76 

74.053.86 

1,290,322.88 

63,118.53 

9,753,060.45 

209,386.33 

63,291.49 

2,136,603.69 

240, 628 .77 

146,410.08 

4,528,640.76 

256,485.34 

81,670.75 

56.079.52 

225,627.60 

584,747.95 

226,439.76 

51,905.60 

406,314.10 

311,253.61 

307,595.93 

582,206.22 

51,532.41 


Special 

Excise 

Tax 


%  21,061.93 


37,106,395.47 


1,921.41 

3,416.14 

90,475.06 

18,288.98 

81,486.93 

5.49 

1,940.82 

3,015.79 

28,462.02 

~"~3~647~.23 

63,792.86 
29,480.05 
33,273.31 

1,415.01 
33,190.25 
63,608.46 

6,140.60 
15,863.65 
92,781.71 
34,398.64 
31.003.90 
11,933.51 
37,057.67 

9,411.44 

1.215.90 
10.559.97 

3,175.12 
113,815.34 


309,163.77 

32,010.23 

344  .60 

99,982.93 

19,648.67 

29,693.29 

227,449.45 

22,630.87 

5,945.62 

2,093.86 

18.701.80 

44,447.69 

9,671.67 

4,434.76 

28,426.56 

3,663.07 

8,235.13 

30,336.70 

954 .22 


1,743,074.08 


50  Per  Cent 
and  100  Per 
Cent  Addi- 
tional Tax 


I    2,919.32 

16.63 

262 .25 

406.28 

4,563.11 

1,147.27 

461.44 

277 .94 

38.37 

1,199.61 

3,327.33 

172  .45 

5,591.75 

20.664.27 

3,245.27 

3,383.49 

511.69 

1,102.25 

2,446.02 

3,858.31 

480.71 

6,455.83 

2,854.07 

2,718.27 

2,348.21 

4,736.68 

391 .92 

126.98 

9.88 

491 .20 

4,554.60 

193  .80 

15,091.43 

1,220.35 

1,192.60 

10,999.33 

715.19 

604 .73 

10,827.86 

192 .50 

513.30 

1,105.30 

456 .52 

5,009.33 

354 .03 

302 .80 

2,406.70 

1,792.47 

2,852.22 

554  .24 

329  .58 


137,482.73 


Total 


$  170 


1, 


357 

644 
117 
125 
107 
319 
198 

95 

3,662 

643 

440 

234 

378. 

362. 

282 

389, 

1,773 

1,317. 

1,233, 

64, 

1,092, 

140, 

225, 

50, 

77, 
1,408, 

63, 

10,077, 

242, 

69, 

2,247, 

260, 

176, 

4,766 

279, 

88, 

59 
244 
634 
236 

56 
437 
316 
318 
613 

52 


,904.79 
274.98 
509.64 
895 .89 
909.14 
295  .80 
708 .49 

977 .27 
835  .92 
433  .28 
793.51 
655 .07 
S03 .76 
232 .83 
512.09 
027  .76 
625 .48 
134 .33 
804.05 
128 .56 
268.01 
733 .70 
446.38 
436  .95 
109  .73 
335 .01 
109.58 
685 .56 
403 .61 
720.18 
692.82 
312.33 
315.65 
616.91 
828.69 
586 .00 
992 .63 
703.10 
918.07 
308  .71 

129 .67 

278 .68 
785  .92 
204  .97 
465 .46 
643.16 
147.36 
709.15 

633 .28 
0117. 16 
816.21 


38,986,952.28 


374 


Federal  Income  Tax 


Comparative  statement  of  corporation  returns  received,  number  of  taxable  returns,  and  the  amount  of  tax 
assessed  against  corporations  during  the  years  ended  June  SO,  1914,  and  June  SO,  1915,  by  districts. 


District 


Alabama- 

Arkansas : 

First  California 

Sixth  California 

Colorado 

Connecticut 

Florida.- - 

Georgia.. _ 

Hawaii 

First  Illinois 

Fifth  Illinois 

Eighth  Illinois 

Thirteenth  Illinois. 

Sixth  Indiana 

Seventh  Indiana 

Third  Iowa 

Kansas 

Second  Kentucky 

Fifth  Kentucky 

Sixth  Kentucky 

Seventh  Kentucky 

Eighth  Kentucky 

Louisiana 

Maryland. 

Third  Massachusetts 

First  Michigan 

Fourth  Michigan 

Minnesota 

First  Missouri 

Sixth  Missouri 

Montana 

Nebraska . 

New  Hampshire. 

First  New  Jersey 

Fifth  New  Jersey 

New  Mexico 

First  New  York 

Second  New  York 

Third  New  York 

Fourteenth  New  York 

Twenty-first  New  York 

Twenty-eighth  New  York... 

Fourth  North  Carolina 

Fifth  North  Carolina 

North  and  South  Dakota... 

First  Ohio 

Tenth  Ohio 

Eleventh  Ohio 

Eighteenth  Ohio 

Oklahoma 

Oregon 

First  Pennsylvania 

Ninth  Pennsylvania- 

Twelfth  Pennsylvania2 

Twenty-third  Pennsylvania- 
South  Carolina 

Tennessee 

Third  Texas _ 

Second  Virginia 

Sixth  Virginia 

Washington 

West  Virginia 

First  Wisconsin 

Second  Wisconsin 


Totals 316,909 


Returns 
Received 


4,102 
2,333 

13,177 
7,191 
9,241 
5,830 
2,239 
4,783 
537 

14,716 
1,020 
2,577 
1,921 
5,446 
2,043 
7,484 
5,003 
1,203 
1,746 
450 
784 
568 
3,255 
6,380 

10,407 
5,184 
3,128 
8,427 
7.0S8 
5,358 
7,191 
5,267 
5,021 
3,101 
7,090 
1,821 
5,480 

13,514 
8,654 
4,767 
3,691 
5,977 
2,270 
2,316 
5,304 
4,480 
3,062 
3,431 
6,038 
6,112 
4,497 
6,858 
4,171 


7,030 
3,246 
4,798 
8,310 
2,332 
2,033 
10,069 
4,449 
6,240 
4,663 


Returns 
Showing 
Tax  Due 


3,238 
1.456 
6,294 
3,272 
3,560 
4,345 
1,499 
3,588 

357 
9,346 

720 
1,798 
1,130 
3,453 
1,472 
5,232 
2,727 

843 
1,191 

311 

511 

398 
2,169 
3,721 
6,852 
3,318 
1,918 
5,747 
4,897 
3,636 
3,530 
3,141 
3,209 
1,417 
4,110 

935 
2,641 
6,219 
5,477 
2,892 
2,327 
3,572 
1.673 
1,575 
3,622 
2,433 
1,977 
2,003 
4,273 
2,833 
2,332 
3,938 
2,716 


4,558 
1,995 
2,649 
5,887 
1,631 
1,427 
4,283 
2,575 
3,399 
2,618 


188,866 


Total  Tax 


$  298,781.72 
123,844.16 

1,397,893.52 
516,860.10 
389,822.87 

1,001,063.68 
123,581.68 
359,600.61 
116,698.73 

3,962,892.98 

170,364.70 

140,005.31 

112,855.30 

576,458.50 

124,404.70 

413,701.58 

327,941.63 

35,217.14 

254,367.43 

23,007.96 

50,140.26 

35,258.83 

366,581.75 

761,697.25 

1,955,253.53 

1,119,449.06 
268,354.47 

1,485,289.30 
948,775.14 
353,011.38 
425,927.46 
212,074.89 
447,374.72 
271,282.88 

1,267,685.46 
140, 649 .52 
387,519.18 

6,734,189.16 

1,738,499.20 
479,860.82 
302,384.75 
979,264.87 
91,142.04 
149, 132 .55 
130,988.81 
514,434.58 
545,916.40 
230, 725 .67 

1,390,729.14 
236,044.33 
198,186.65 

2,558,418.23 
459,450.83 


2,669,148.21 
134,637.67 
289,891.79 
713,038.95 
311,556.12 
203,404.90 
385,527.03 
351,557.68 
484,911.45 
146,767.88 


43,395,500.09 


Returns 
Received 


3,104 
2,363 

12,207 
8,102 
9,114 
3,816 
2,693 
4,763 
564 

16,057 
1,059 
2,788 
2,156 
5,399 
2,449 
8.142 
4,346 
1,251 
1,917 
477 
899 
671 
3,772 
5,781 
7,017 
5,754 
3,326 
8,828 
8,004 
5,665 
3,937 
4,684 
4,577 
2,516 
4,319 
1,941 
5,631 

12,183 


,875 
5,076 
3,398 
6.260 
2,277 
2,322 
4,458 
3.410 
3,087 
3,171 
6,346 
5,839 
4,854 
6,936 
3,603 
83 
7,222 
2,075 
4,323 
8,513 
2,896 
2,039 
8,504 
4,647 
6,500 
4,459 


299,445 


Returns 
Showing 
Tax  Due 


2,591 
1,570 
6,040 
3,091 
3,453 
3,229 
1,412 
3,009 

379 
7,644 

640 
1,818 
1,250 
3,497 
1,521 
5,342 
3,070 

754 
1,151 

298 

515 

396 
2,014 
3,058 
6,325 
3,411 
1,813 
5,424 
4,187 
3,583 
3,724 
3,084 
3,058 
1,326 
3,626 

854 
2,608 
5,859 
4,310 
2,459 
1,982 
3,251 
1,590 
1,407 
3,182 
2,061 
1,953 
1,851 
4,290 
2,729 
2,073 
3,799 
2,607 
47 
4,095 
1,532 
2,594 
5,071 
1,531 
1,277 
3,490 
2,485 
3,270 
2,645 


174,205 


Total  Tax 
Assessed ' 


$  196 
83 
1,178 
432 
389, 
819, 

103; 

288, 
198 

3,222 

129, 

130, 

95 

492, 

117 

403, 

232, 

31, 

235, 

20, 

37, 

19, 

296, 

616 

1.674, 

1,023. 
257, 

1,199 
705, 
345, 
443, 
224, 
398, 
240, 

1,049, 
130 
425, 

6,342, 

1,587, 
467, 
290, 
639, 
76, 
133, 
124, 
472, 
371, 
197, 

1,095, 
240, 
146, 

2,149, 

553, 

19, 

1,806, 
81, 
225, 
584, 
262, 
142, 
317, 
307, 
445, 
136, 


,751.55 
073.47 

998 .61 
701 .22 

391 .96 
245 .46 
217.88 
004.16 
482.62 
951 .30 
103  .32 
415  .97 
305.11 
981 .35 
805  .42 
370.96 
698.78 
180.48 
057 .07 
706.59 
612 .42 
285 .27 
749 .57 
311.23 
496.16 
096.26 
097.41 
714  .78 
345.05 
195.61 
910.76 
342 .68 
089.11 
393 .91 

928 .97 
444.51 
093 .80 
964 .S9 
441.64 
270 .56 

942 .34 
347.22 
257.22 
129.11 
371 .01 
763 .33 
252.03 
150.20 
438.13 
628 .77 
410.08 
888  .49 
590 .85 

092 .62 
068.80 
670.75 
627.60 
747 .95 
316.09 
161 .00 
511.96 
595 .93 
314.87 

891 .35 


37,106,395.47 


•The  figures  given  in  these  columns  represent  taxes  assessed  on  basis  of  returns  received  and  do  not 
include  the  50  per  cent  and  100  per  cent  additional  tax  or  special  excise  taxes  assessed  during  the  year. 
'Reestablished  May  1,  1915. 


Statistics 


375 


Comparative  statement  of  corporation  returns  received,  number  of  taxable  returns  and  the  amount  of  tax 
assessed  against  corporations  during  the  years  ended  June  SO,  191J^,  and  June  SO,  1915,  by  States. 


1914 

1915 

States  and  Territories 

Returns 
Received 

Returns 
Showing 
Tax  Due 

Total  Tax 
Assessed l 

Returns 
Received 

Returns 
Showing 
Tax  Due 

Total  Tax 
Assessed  * 

2,747 

174 

983 

2,333 

19,321 
7,863 
4,096 
975 
1,170 
2,239 
4,783 
537 
1,398 

20, 234 
7,489 
7,484 
5,008 
4,751 
3,255 
2,927 
4,195 

10,407 
8,312 
8.427 
1,355 

12,446 

2,606 

5,267 

1,047 

965 

10,191 
838 

42,083 
4,586 
2,671 

17,011 
6,112 
4,497 

18,059 
1,734 
3,246 
2,633 
4,798 
8,310 
3,187 
1,129 
4,405 
9,895 
4,449 

10,903 
1,378 

2,137 
70 

489 
1,456 
9,227 
2,979 
3,193 

461 

451 
1.499 
3,588 

357 

768 
12,994 
4,925 
5,232 
2,727 
3,254 
2,169 
1,878 
2,778 
6,852 
5,236 
5,747 
1.101 
8,533 
1,366 
3,141 

339 

736 
5,527 

446 

23,128 

3,248 

l.'i>,7 

10,686 

2,833 

2,332 

11,212 

1,152 

1,995 

1,635 

2,649 

5,887 

1,396 

595 
3.0S9 
4,213 
2,575 
6,017 

581 

$  20S.486.14 

4,631.24 

87,537.37 

123,844.16 

1,864,322.49 

335,894.75 

682,247.42 

183,894.67 

185, 144 .03 

123,581.68 

359,601.61 

116,698.73 

54,577.92 

4,386,118.30 

700,863.20 

413,701.58 

327,941.63 

397,991.62 

366,581.75 

307,504.94 

391, 187 .OS 

1,955,253.53 

1,387,803.53 

1,485,289.29 

90,295.58 

1,301,786.52 

150,519.20 

212,074.89 

50,431.13 

83,291.03 

1,538,968.34 

53,112.15 

10,621,717.97 

240,274.59 

77,947.40 

2,681,805.79 

236.044.33 

198,186.65 

5,687,017.28 

318,816.26 

134,637.67 

53.041.41 

289,891.79 

713,038.95 

220,830.34 

56,578.75 

516,432.49 

380,895.79 

351,557.68 

631,679.33 

53,928.12 

1,912 

157 

1,026 

2,363 

19,939 

7,803 

2,667 

843 

966 

2,693 

4,763 

564 

968 

22,060 

7,848 

8,142 

4,346 

5,215 

3, 772 

2,824 

3,928 

7,017 

9,080 

8,828 

1,192 

13,669 

1,551 

4,684 

370 

940 

6,835 

915 

37,423 

4,599 

2,353 

16,014 

5.839 

4,854 

17,844 

1,149 

2,075 

2,105 

4,323 

8,513 

1,418 

813 

4,979 

8,347 

4,647 

10,959 

1,311 

1,576 

82 

346 

1,570 

8,816 

2,842 

2,268 

448 

564 

1,412 

3,009 

379 

878 

11,352 

5,018 

5,342 

3,070 

3,114 

2,014 

1,829 

2,016 

6,325 

5,224 

5,424 

1,015 

7,770 

1,492 

3,084 

315 

666 

4,952 

508 

20,469 

2,997 

1,714 

10,155 

2,729 

2,073 

10,548 

961 

1,532 

1,468 

2,594 

5,071 

1,354 

563 

2,838 

3.403 

2,485 

5,915 

611 

S    146,923.54 

6,258.35 

67,325.98 

83,073.47 

1,571,865.97 

337,859.55 

562,760.12 

117,693.84 

123,856.73 

Florida 

103,217.88 

288,004.16 

198,482.62 

87,164.78 

3,577,775.70 

610,786.77 

403,370.96 

232, 698 .78 

343,841.83 

296,749.57 

272,129.65 

372.923.65 

1,674,496.16 

1.2S0.193.67 

1,199,714.78 

49,828.01 

1,050,540.66 

130,306.22 

224,342.68 

39,833.76 

74,053.89 

1,290,322.88 

63,118.53 

9,753,060.45 

209.3S6.33 

68,291.49 

Ohio 

2,136,603.69 

240, 628 .77 

146.410.08 

4,528,040.76 

256,485.34 

81,670.75 

56,079.52 

225,627.60 

584,747.95 

Utah.. _ 

226,439.76 

51,905.60 

406,314.10 

311,253.61 

307,595.93 

582,206.22 

51,532.41 

Totals 

316,909 

188,866 

43,395,500.09 

299,445 

174,205 

37,106,395.47 

'The  figures  given  in  these  columns  represent  taxes  assessed  on  basis  of  returns  received  and  do  not 
include  the  50  per  cent  and  100  per  cent  additional  tax  or  special  excise  taxes  assessed  during  the  year. 


376 


Federal  Income  Tax 


Tax  assessed  on  corporations  during  the  year  ended  June  SO,  1915,  on  basis  of  revenue  agents1  examinations 
of  returns  for  the  years  1909  to  1914,  by  divisions. 


Division 

1909 

1910 

1911 

1912 

1913 

1914 

Total 

Albany1 

$  3,137.64 

8,619.77 

1,319.03 

8,377.08 

27.04 

5,042.23 

17,076.93 

1,208.88 

349.12 

1,841.39 

7,013.13 

4,814.16 

9,862.99 

271 .22 

4,635.46 

1,228.86 

4,604.31 

4,469.15 

45,745.42 

5,894.91 

128.69 

44,168.54 

538 .82 

5,934.45 

3,937.03 

1,836.92 

6,870.54 

11,287.52 

17.73 

10,418.65 

22,744.42 

8  4,310.04 

11,974.34 

1,725.82 

12,189.45 

28.16 

13,338.69 

20,429.32 

5,374.49 

852.59 

2,972.24 

9,603.74 

5,987.87 

17,625.38 

370 .88 

7,273.46 

1,552.31 

5,964.09 

9,290.94 

62,722.30 

6,776.88 

311.65 

43.6S0.80 

557 .69 

10,913.38 

7,151.41 

2,829.80 

12,860.52 

16,605.91 

116.71 

15,832.50 

11,876.50 

S  5,626.72 

13,939.64 

1,722.49 

22,781.37 

50.49 

13,282.78 

19,753.71 

7,315.07 

658.45 

1,178.89 

8,205.10 

12,551.38 

411.52 

8,340.59 

1,371.19 

7,848.42 

13,067.94 

91,390.96 

9,942.32 

258.56 

49  985.70 

1,663.19 

8,552.99 

6,160.82 

3,358.53 

17,029.07 

14,890.76 

44S  .05 

18,289.95 

16,942.92 

$21,644.92 

18,493.31 

7,831.68 

41,367.99 

77.02 

27,192.64 

20,756.47 

21,586.38 

620 .08 

735.10 

13, 90S .71 

5,555.84 

13,159.39 

1,225.06 

12,224.30 

2.849.62 

5,967.73 

11,499.06 

139,038.56 

8,880.06 

878.55 

86,928.40 

2, 129 .79 

8,420.56 

7,323.50 

5,770.34 

18,456.38 

14,341.90 

5,452.95 

19,781.83 

42,078.83 

829,609.44 

18,424.37 

2,235.02 

43,843.46 

149.61 

43,261.21 

22,172.75 

8,914.57 

563.81 

1,090.61 

15,450.56 

8,279.04 

9,771.57 

1,378.04 

12,172.92 

1,371.16 

6,983.56 

51,700.27 

187,896.71 

7,251.83 

1,841.08 

132,302.35 

559 .68 

6,995.17 

8,983.98 

8,922.89 

21,978.23 

16,448.50 

351 .06 

25,360.44 

53,831.36 

$ 

124  .94 
42.40 

5,238.37 
107.99 

4,249.47 
824.55 
831 .72 

4,438.38 
454.11 
346.72 
292.83 

2,161.06 

S  64,328.76 
71,566.37 

Baltimore 

14,876.44 
133,797.72 

Buffalo'. 

440.31 
106,367.02 

Cincinnati 

101,013.73 
45,231.11 

Detroit' 

Elizabeth' 

Greensboro 

Hartford'- 

Indianapolis — 
Little  Rock' 

7,482.43 
8,272.34 
54,527.96 
30,076.68 
65, 131 .77 
3,656.72 

Louisville 

Milwaukee'..  .. 

Nashville 

New  Orleans  ... 
New  York 

661.14 

1,071.85 

414.80 

486.21 

10,845.37 
334 .79 
732.02 

19,737.56 

933 .25 

728.15 

1,204.67 

45.307.87 
9,444.99 
31,782.91 
90,513.57 
537,639.32 
39,080.79 

Parkeraburg'—. 
Philadelphia  ... 

Pittsburg' 

Portland 

Richmond 

4,150.55 
376,803.35 

6,387.42 
41,544.70 
34,761.41 
22,718.48 

St.  Louia - 

St.  Paul 

Salt  Lake' 

San  Antonio  — 
Saa  Franciaco.. 

9,592.34 
2,211.74 
36.70 
1,119.94 
1,313.02 

86,887.08 
75,786.33 
6,423.20 
90,803.31 
148,787.05 

Totals 

243,522.03 

323,099.86 

382,171.46 

586,176.95 

750,095.25 

70,526.14 

2,355,591.69 

discontinued  and  reestablished  at  Buffalo. 

^Established  during  the  year. 

•Discontinued  and  reestablished  at  Parkersburg,  W.  Va. 


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PART  VIII 


INDEX 


All  of  the  preceding  seven  parts  of  this  book  are  included 
herein  under  one  combined  alphabetical  index.  For  general 
subjects,  refer  to  Table  of  Contents. 

References  herein  to  the  Analysis  (Part  I)  are  abbre- 
viated to  "A,"  followed  by  the  number  of  the  paragraph,  as 
"A49,"  referring  to  1149  of  the  Analysis. 

Part  II,  The  Complete  Statute,  is  referred  to  as  "St.," 
followed  by  the  letter  reference  to  the  section,  as  "St.  Ga," 
referring  to  Statute,  section  G,  and  subsection  a. 

Treasury  Regulations,  Part  III,  are  abbreviated  as  "T. 
R.,"  followed  by  the  number  of  the  article,  as  "T.  R.  141," 
referring  to  Article  141  of  the  Treasury  Regulations. 

Treasury  Department  special  rulings.  Part  IV,  are  abbre- 
viated as  "T.  D.,"  followed  by  the  number,  as  "T.  D.  2006," 
referring  to  Treasury  Department  ruling  No.  2006. 

The  Supreme  Court  opinion  in  the  Brushaber  case,  Part 
V,  is  referred  to  as  "Sup.  Ct,"  followed  by  the  page  of  the 
book. 

Forms  and  Statistics,  Part  VI  and  Part  VII,  are  given 
in  full  wherever  mentioned. 

The  reason  for  this  method  of  indexing  in  preference  to 
indexing  by  pages  is  that  the  index  references  here  given 
apply  to  the  Statute  and  Regulations  wherever  found  in  any 
publication. 

See  abbreviations  preceding  Part  I. 


INDEX 


A 

Abatement: 

Claim  for,  of  tax,  may  be  filed  when,  by  whom.  .  .  .  A54;  T.  R.  33c 
Absence: 

From   U.    S.,   who   may    make   claim    for    deductions 

(Form  1008)  for  A35;     T.  R.  33b 

ACCBUED  INCOME  DEFINED   A46 ;   T.  D.  2090 

Act  of  1894   A9 

Act  of  1913  A14 

Actobs,  costumes  T.  D.  2090 

Additional  tax  (A16) : 

Nonresident  alien  subject  to,  computed  same  as  for 

citizens  of  United  States p.  216;  T.  R.     8 

Regluations  for  St.  A2;  T.  R.      2 

Additions  and  bettebments: 

Constituting  increase   in   capital   investment   not   de- 
ductible expense  of  corporation T.  R.  118 

Adjustment: 

Assessment  of  tax  withheld,  withholding  agent  to  be 

notified    T.  R.  33c 

Administbatob: 

Expenses  of  T.  D.  2135 

Is  fiduciary  when T.  R.    70 

Make  return   of  income   deceased   person,   when   and 

what  T.  D.  2152;  T.  D.  2090;  T.  R.    17 

Affidavit: 

Verifying  return  of  income,  before  whom  made T.  R.    22 

Agent: 

Authorized,  may  sign  for  principal,  certificate  of  own- 
ership of  bond T.  R.    43 

Compensated  on  commission  basis,  income  of,  not  sub- 
ject to  withholding  at  source T.  R.    32 

Defined T.  D.  2090;  T.  D.  2006;  T.  D.  2135 

Return  made  by,  when T.  R.    17 

Signing    for    principal,    certificate    of    ownership    of 
bonds,  to  furnish  evidence  of  authority  to  act,  when .     T.  R.    43 
Agbicultubal  obganizationb  : 

Exempt  from  tax St.  G(a) ;  A15;  p.  253 


384  Index 

Aliens  : 

Nonresident  (A45;  T.  D.  2013;  T.  D.  2090;  T.  D.  2135; 
T.  D.  2152)  — 
Duly  authorized  agent  of,  to  make  return  for  and 

pay  tax,  when  p.  216 ;  T.  R.      8 

Income  of,  what  to  be  included  in  return  of T.  R.      8 

Net  income  of,  defined T.  R.      8 

Normal  tax  on  entire  net  income  of T.  R.      8 

Not  allowed  exemption T.  R.      8 

Not  entitled  to  exemption T.  R.      3 

Not  taxable  on  income  from  stocks  and  bonds  in 

domestic  corporations T.  D.  2017 

Residence  defined  T.  D.  2242 

Royalties  T.  D.  2137 

Subject  to  additional  tax T.  R.      8 

Taxable  on  entire  net  income  in  United  States...     T.  R.      1 
Tax  on  coupons  or  registered  interest  payable  in 
United  States  to  be  withheld  unless  certificate 

of  exemption  T.  D.  1977;  T.  D.  2162;  T.  R.    46 

Resident — 

Certificate  of  ownership  of  bond,  when  and  how  to 

be  used,  and  to  specify  what T.  R.    42 

Income  of,  from  coupon  or  registered  interest,  tax 
on  to  be  deducted  and  withheld  except  to  ex- 
tent exemption  claimed   T.  R.    44 

Taxable  on  net  income  less  exemption  and  deduc- 
tions      T.  R.      1 

Alimony    T.  D.  2090 

Amendment,  sixteenth A12 

Amendments  : 

Sections  3167,  3172,  3173,  3176,  Rev.  Stat St.  I 

Americans  residing  abroad A35 

Amortization  : 

Depreciation  for,  corporation  allowed,  when,  how.A28; 

T.  D.  2161;  T.  R.  135 

Analysis  pp.  1-39 

Annual  return: 

Form  1013,  to  show  what,  and  to  be  filed  on  or  before 

March  1  each  year T.  R.    50 

Of  coupons  or  interest  orders  not  accompanied  by  cer- 
tificate of  ownership  (form  of),  what  to  show  when 

filed,  totals  only  of  monthly  return T.  R.    53 

Of  licensee  for  collection  of  foreign  items  (form  of), 

what  to  show,  with  whom  filed,  when T.  R.    59 


Index  385 

Annuity: 

Money  paid  for  (returned)  not  to  be  included  in  gross 

income     T.  D.  2152 ;     T.  R.      5 

Taxable,  how  treated T.  R.    63 

Answer: 

Of  guardian,   etc.,  to  notice  for  failure  to  make   re- 
turn, may  show  what T.  R.    18 

Appeal: 

Decision  of  collector — 

All  papers  of,  to  Commissioner  of  Internal  Reve- 
nue;    dissatisfied    may    submit    case;     furnish 

sworn  testimony  to  prove  facts St.  D 

Application  : 

For  license — 

For  collection  foreign  items A55;     T.  R.    56 

To  collect  foreign  items  to  be  made  through  prin- 
cipal   office    to    collector   of    district    in    which 

located  principal  office T.  R.    57 

Applied  surrender  values  and  consideration: 
For  supplementary  contracts — 

To  be   both   added   and   deducted   in   return   life 

insurance  company   T.  R.  102 

Arrangement  and  packing: 

Certificates,  reports,  returns,   for   forwarding  by  col- 
lector         T.  R.  194 

Assessment  (A44) : 

Amount  of,  when  persons  shall  be  notified St.  E 

Basis  of  calendar  year  or  fiscal  year,  time  to  be  made.     T.  R.  177 

Failure  to  pay,  extra  tax  on A40 ;   St.  E 

Form  and  notice  of T.  R.  197 

Insurance  company,  reserve  of,  definition T.  R.  147d 

Limitation  on  time  of  making St.  E 

List  rendered,  collector  to  forward T.  R.  192;  T.  D.  2024 

Made  by  Commissioner  of  Internal  Revenue St.  E 

Of  tax  to  be  made  by  Commissioner  of  Internal  Reve- 
nue      T.  R.    25 

Against  income  withheld  at  source,  where  to  be 

made    T.  R.    38 

Against  withholding  agent T.  R.    36 

Of  tax  against  withholding  agent,  deferred  until  agent 

makes  return    T.  R.  189 

On  stock  by  corporation T.  D.  2090 

Penalty  and  interest  for  nonpayment  of,  exceptions.  .  St.  E 

Persons  notified  of  amount  of St.  E 

When  to  be  paid St  E 

25 


386  Index 

Assets,  capital: 
Corporation — 

Change  in  book  value  by  annual  adjustment  on 
books,  that  value  to  be  used  in  making  annual 

returns,   net   income T.  D.  2161;     T.  R.  Ill 

Change    in    book   value   by   reappraisal,    gain    or 

loss,   how   computed T.  R.  Ill 

Loss  from  sale  of,  how  ascertained T.  R.  128 

Profit  or  loss  on  sale  of,  how  determined p.  227 

Sale  of  corporation,  net  income  from,  how  deter- 
mined          T.  R.  109 

Sale  of  by  corporation,  income  from,  how  deter- 
mined          T.  R.  108 

Shrinkage    in    book    value    of    corporation,    how 

treated     T.  R.  134 

Association  : 

Charitable,  exemption,  when St.  G(a) 

Making  false  return,  penalty  for St.  F 

Mutual,   domestic   building,    etc St.  G(a) 

Neglecting  to  make  return,  penalty  for St.  P 

Net  income  of,  preceding  calendar  year,  normal  tax  on.  St.  E 

Operating  under  "Lodge  system"  defined T.  R.    89 

Refusing  to  make  return,  penalty  for St.  P 

Religious,   exemption    St.  G(a) 

Return  of,  when  available St.  G(a) 

Scientific,  exemption,  when St.  G(a) 

Taxes  to   be   assessed   by   Commissioner  of   Internal 

Revenue,  when,  section  3176 St.  I 

To  make  list  or  return  of  taxes,  how,  when,  section 

3173    St.  I 

Authors: 

Earnings  of,   indefinite  or   irregular,   not   subject   to 

withholding  at  source T.  R.    32 

B 

Bad  debts  (A25;  T.  D.  2201): 

Corporation,  deductible,  when   T.  R.  125;  T.  D.  2090 

Collected,  are  income T.  R.  125 

Balances: 

Outstanding  tax,  how  treated T.  R.  199 

Banks  (A38;  T.  D.  2161;  T.  D.  2258): 

Allowing   interest   on   deposits,   not   to   withhold    tax 

from   T.  R.    67 


Index  387 

Banks — Continued. 

Deductible    status    of    taxes    assessed    against    stock- 
holder, paid  by T.  R.  154;  T.  D.  2135;         p.  297 

Guaranty    fund   p.  253 

Interest  paid  on  deposits  allowable  deduction,  St.  G(a) ;  T.  R.  149 
Taking  coupons  for  collection,  originated  or  payable 

in  the  United  States,  duty  of T.  R.    39 

Private  pp.  289,  295 

Mutual  savings — 

Not  having  capital  stock  represented  by  shares, 

exempt  from  tax   St.  G  (a ) 

Beneficiaries  (T.  D.  2090;  p.  232): 

Exemption  from  tax  may  be  claimed  by,  from  fidu- 
ciaries         T.  R.    74 

Interest   received   by,    from   insurance   companies   on 

insurance  contract,  part  of  gross  income T.  R.      5 

Bequest  (A29) : 
Of  property — 

Income  from  part  of  gross  income T.  R.      4 

Value   of,   not   income T.  R.      4 

Value  of,  is  income  to  corporations p.  257 

Board,  lodging,  etc T.  D.  2135 

Boards  of  Trade: 

Exempt,  when  St.  G(a) 

Bond: 

May  be  required  of  licensee  for  collection  of  foreign 

items     A55 ;     T.  R.    56 

Premium  on  by  employee p.  232 

Bond  and  mortgages: 

Interest  on,  subject  to  deductions,  when St.  E;  A22 

Bonds,  etc.: 

Discount,  deductible  T.  D.  2137 

Government  A28;  T.  D.  1892;  T.  D.  1946 

Of  corporations,  etc. — 

Income   from,   subject  to   withholding  at  source, 

regardless    of    amount T.  R.    37 

Interest  and  funding  p.  232 

Interest  of  foreign,  subject  to  deduction  and  with- 
holding,  when    St.  E;  T.  D.  1992 

Irrigation    p.  298 

Bookkeeping: 

Requisites  of,  for  verifying  return A57;     T.  R.  182 

Books: 

Of  corporation  subject  to  examination,  by  whom,  for 
what,  result  T.  R.  186 


388  Index 

Book  value: 

Capital  assets — 

Change    in,    by    reappraisal,    gain    or    loss,    how 

computed    T.  R.  Ill 

Shrinkage  in,  how  treated T.  R.  134 

Bbokees  A24 ;  A50 ;  T.  D.  2090 ;  p.  12 

Brush aber  case: 

In  full  p.  323 

Summarized     A13 

Building  : 

Removal  of,  corporation,  not  deductible  loss,  why. ...     T.  R.  127 
Building  and  loan  association: 

Domestic,  defined;  what  necessary  to  exempt  from  tax     T.  R.    87 
Business: 

Defined    p.  202 

Lawful,  carried  on  for  gain  or  profit;    income  from 
part  of  gross  income T.  R.      4 

C 
Calendar  teas: 

To  govern  when  notice  of  corporation  fiscal  year  not 

given  in  time A37;     T.  R.  168 

Capital  assets: 

Book  value  of  corporation,  shrinkage  in,  how  treated .     T.  R.  134 
Corporation — 

Change   in   value   of,    by   annual    adjustment   on 
books,  that  value  used  in  making  return  annual 

net  income  T.  R.  Ill 

Change  in  book  value  by  reappraisal;  gain  or  loss, 

how  computed T.  R.  Ill 

Loss  from  sale  of,  how  ascertained T.  R.  128 

Net  income  from  sale  of,  how  determined T.  R.  109 

Profit  or  loss  on  sale  of,  how  determined 

T.  R.  110;  T.  D.  2077 
Sale  of,  by  corporation,  income  from,  how  deter- 
mined          T.  R.  108 

Capital  investment: 

Corporation,  increased  by  additions  and  betterments, 

not  deductible  expense  T.  R.  118 

Cases  : 

Brushaber  case A13 

Excise  tax  cases All 

Pollock  case A10 

Cemetery  company: 

Taxable  status  depends  on  what T.  R.    90 


Index  389 

Certificate  (See  Forms) : 

Accompanying     foreign     items,     disposition     of,     by 

licensee T.  R.    61 

Claiming    deductions    account    partnership    expense, 

what  and  how T.  R.    47 

Claiming    exemption    and    deductions    to    accompany 

annual  return  of  withholding  agents T.  R.    69 

Claiming  exemption — 

As  nonresident  alien  must  be  filed  or  tax  with- 
held from  payment  coupon  or  registered  in- 
terest        T.  R.    46 

For  nonresident  alien,  may  be  executed  by  whom.     T.  R.    46 
From  tax  on  registered  interest  to  be  filed  at  least 

five  days  before  due  date  of  interest T.  R.    44 

Of  withholding,  by  foreign  organizations   (Form 

1018)     T.R.    46 

Exemption  or  deduction,  disposition  of T.  R.  194 

Form  of,   for   foreign   partnership   composed   of  non- 
resident   aliens,    resident    aliens,    and    citizens    of 

United    States  T.  R.    49 

Not  subject  to  emergency  tax T.  D.  2049 

Of  deposit,  interest  on,  part  of  gross  income T.  R.      4 

Of    ownership    accompanying    coupons    or    registered 

orders,  duty  of  collecting  agency T.  R.    39 

Of  ownership T.  D.  1976;  p.  233 

By  corporations  organized  in  United  States  claim- 
ing exemption,  form  of,  and  how  executed....     T.R.    45 

Disposition  of,  by  collecting  agent T.  R.    40 

Not  accompanying  coupons  or  interest  orders,  tax 
to  be  withheld  by  first  collecting  agent,  disposi- 
tion of  certificate T.  R.    52 

Of  persons  not  subject  to  "having  tax  withheld, 
disposition    of,    by    debtors    and    withholding 

agent    T.  R.    51 

Of  bonds— 

By  citizen  or  resident  of  United  States,  when 

and  how  to  be  used  and  to  specify  what. . .     T.  R.    42 
By  corporations  organized   in  United   States 
and  certain  exempt,  must  be  filed  to  pre- 
vent withholding  T.  R.    45 

May  be  signed  by  authorized  agents T.R.    43 

Of  corporations,  etc.,  organized  or  doing 
business  in  United  States,  form  of,  for 
foreign  partnership  T.  R.    48 


390  Index 

Ceetificate — Continued. 

Of  ownership — Continued. 
Of  bonds — Continued. 

Signed  by  agent,  when  verified  by  first  with- 
holding agent,  etc.,  good  in  all  other  hands.     T.  R.    43 

Who  to  make  and  for  what T.  R.    39 

Size  of  and  paper  for Preface  to  Part  III 

Substitute  by  collecting  agent,  how  to  be  treated  by 

debtors  or  withholding  agent T.  R.    51 

That  of  collecting  agent  substituted  when T.  R.    40 

Certificates,  reports,  returns: 

Arrangement  and  packing  of,  for  forwarding  by  col- 
lector        T.  R.  194 

Chambers  of  commerce: 

Exempt,  when  St.  G(a) 

Change  in  book  value: 

Capital  assets,  corporation,  reappraisal,  gain  or  loss, 

how    computed   T.  R.  Ill 

Citizen: 

Income  of,  from  coupon  or  registered  interest,  tax  to 

be  withheld  on  except  to  extent  exemption  claimed.     T.  R.    44 
Of  United   States,   certificate   of  ownership   of  bond, 

when  and  how  to  be  used  and  to  specify  what T.  R.    42 

Residing  abroad   A35 

Taxable  on  net  income  less  exemption  and  deductions.     T.  R.      1 

Woman  marrying  foreigner p.  233 

Citizenship: 

How  determined  T.  D.  2135 

Civic  leagues: 

Exempt,  when  St.  G(a) 

Organizations — ■ 

Exempt,  when St.  G(a) ;  A15 

Claim: 

For  exemption — 

By  whom,  for  what,  who  to  file T.  R.    41 

Paragraph   C,   in   connection   with   foreign    item, 

allowed  to  person  entitled  to T.  R.    60 

Penalty  for  false St.  E 

What  must  show  and  how  executed T.  R.    42 

When,  and  when  to  be  filed St.  E 

For  overpaid  tax  A54 

Insurance    company,    amount    actually    paid    under 

policy  contract,  constitute  deduction T.  R.  147c 

Clubs T.  D.  2090;  p.  233 

Collateral: 

Interest  secured  by T.  D.  1993;  pp.  254,  284,  291 


Index  391 

Collecting  agency: 

First  receiving  coupons  or  interest  orders  not  accom- 
panied by  certificates  of  ownership  should  withhold 
tax  and  attach  its  certificate,  Form  1002,  that  tax 

withheld    T.  R.    52 

Agent   (T.  D.  2135)  — 

In  foreign  countries  to  have  privilege  of  substi- 
tuting certificates  for  original  ownership T.  R.    40 

Record  to  be  kept  by,  what T.  R.    40 

Should  require  person  presenting  coupon  or  inter- 
est orders  to  establish  identity T.  R.    52 

Collection  : 

At  service A32 

Of  tax  from  withholding  agent T.  R.    36 

Collector  ( A42 ) : 

Advanced  preparation  notice  of  assessment  by,  par- 
ticulars         T.  R.  198 

Arrangement  and  packing  certificates,  reports,  re- 
turns         T.  R.  194 

Authority  of,  in  any  district,  section  3173 St.  I 

Claim  for  deductions  may  be  filed  with,  when T.  R.    33c 

Copy  of  returns ■  T.  D.  2024 

Dispatch  of  business  in  offices  of T.  R.  195 

Duty  of— 

As  to  returns  withholding  agents T.  R.  193 

In  absence  from  home  or  place  of  business St.  I 

In  case  of  refusal  or  neglect  of  liable  individual 

to  make   return T.  R.    21 

In  case  of  undervaluation  or  understatement St.  I 

If  persons  refuse  or  neglect  to  render  return.  ...  St.  I 

In  forwarding — 

Annual  individual  return  to  Commissioner..     T.  R.    24 
Return  and  assessment  list  and  investigation 

of  return  T.  R.  192 

In  making  returns  for  persons  failing  to  do  so. . .  St.  I 

Upon  receiving  notice  of  fiscal  year  of  corporation     T.  R.  167 

Failure  to  find  person  at  home,  duty  of,  section  3173.  .  St.  I 

Legality  of  returns  made  by,  section  3176 St.  I 

Make  return  for  individual,  when T.  R.    20 

May  enter  any  collection  district  to  examine  wit- 
nesses, when,  section  3173 St.  I 

Method  of  handling  and  accounting  for  outstanding 

tax  balances  T.  R.  199 

Must  require  returns  to  be  verified  by  oath  or  affirma- 
tion          T.  R.    22 


392  Index 

Coixectoe — Continued. 

Not  satisfied  with  responsibility,  applicant  for  license 

to  collect  foreign  items,  may  require  bond T.  R.    56 

Of  what  district,  Form  1008  to  be  filed T.  R.    33b 

Order  of  arrangement,  names  in  list  made  by T.  R.  188 

Shall  make  report  of  false  or  fraudulent  returns,  how, 

section  3176  St.  I 

Shall  require  deputies  to  ascertain  persons  liable  to 

tax,  section  3172 St.  I 

Sickness  or  absence,  may  extend  time  for  making  re- 
turns, section  3176 St.  I 

Tax  statement  rendered  monthly,  particulars  of T.  R.  199 

Tax  withheld  to  be  paid  to T.  R.    34 

To  adjust  in  assessment  in  case  of  withholding,  when.     T.  R.  33c 
To  furnish  withholding  agent  with  statement  of  claim 

for  deductions  filed  with  collector T.  R.  33c 

To   obtain    testimony,    may    summon    whom,    section 

3173    St.  I 

To  report  tax  due,  how,  forms  for T.  R.  187 

To  send  notice  of  what,  form  of  and  time  to  serve. ...     T.  R.  197 

To  send  notice  to  delinquent  and  file  return T.  R.  196 

To   which,   application    of   principal    office   made   for 
license  for  branch  office,  to  serve  collector  in  district 

of  branch  with  what T.  T.    57 

When  claim  for  deductions,  paragraph  B,  to  be  filed 

with   T.  R.  33b 

Commissioner  of  Internal  Revenue: 

Annual  return  of  individual  to  be  forwarded  to,  how. .     T.  R.    24 

Assessments  made  by  St.  D 

Facsimile  of  signature  on  licenses  for  collecting  for- 
eign items  furnished  collectors T.  R.    55 

Shall  add  50  per  cent  or  100  per  cent  to  tax,  when. ...  St.  I 

Shall  assess  taxes,  when,  section  3176 St.  I 

To  impose  additional  tax,  when St.  E 

To    issue    licenses    for    collection    of    foreign    items 

through  collectors   T.  R.    54 

To  make  assessment  of  taxes;   give  notice  of,  when; 
duty  of  in  case  neglect  or  refusal  to  make  return 

or  of  false  or  fraudulent  return T.  R.    25 

Commissions: 

Salary  and  p.  234 

Paid  to  salesmen  in  stock  of  corporation,  deductible 

expense  T.  D.  2090 ;  T.  R.  117 

To  real  estate  agents p.  234 

To  insurance  agents  T.  D.  2011;  T.  D.  2137;  p.  250 


Index  393 

Company : 

Foreign,  normal   tax  on   business   transacted   in   the 

United   States    St.  G(a) 

Joint-stock,   etc.,    withholding   normal   tax   on   behalf 

of  others  St.  E 

Mutual  cemetery,  exempt  when 6(a) 

Taxes  to  be  assessed  by  Commissioner,  when,  section 

3176    St.  I 

Compensation  : 

For  personal  service,  part  of  gross  income 

p.  300;  A31;  T.  D.  2135;  T.  R.      4 
Officers  and  employees  of  State  or  political  subdivision 

of,  not  to  be  included  in  gross  income T.  R.      5 

Paid  to  employees  of  corporation  on  basis  of  stock- 
holdings not  deductible,  why T.  R.  119 

Present  President  and  judges  of  court  exempt  from 

tax,  what   T.  R.     5 

Public-school  teachers  of  State  or  political  subdivision 

of,  not  part  of  gross  income T.  R.      5 

Complaints    A54 

Compromises   T.  D.  2015;  T.  D.  2161;  T.  D.  2193 

Consideration  for  supplementary  contracts  and  applied 
surrender  values: 
To  be  both  added  and  deducted  in  return  life  insur- 
ance  companies   T.  R.  102 

Constitutional  provisions   A6;   A13 

Construction  of  law: 

As  to  withholding  at  source,  liberal Preface  to  Part  III 

Brushaber  case  A13 

Contract: 

Affecting  liability  of  a  taxable  person  as  such,  to  be 

invalid  T.  R.    27 

Contracting  company: 

Income  of T.  D.  2161 

Contractor  with  State: 

Liable  for  tax  p.  295 

Copies  of  returns: 

How  obtained,  for  what  purpose T.  R.  178, 180 

Corporations  (See  A15  and  T.  R.  76-18(1) : 

Additions   and   betterments   constituting   increase    in 

capital  investment  not  deductible T.  R.  118 

All  organized  in  United  States  subject  to  tax  (certain 

exceptions )     T.  R.    76 

Amount  allowed  for  depreciation  of  property St.  G(c) 


394  Index 

Corporations — Continued. 

Amounts  paid  employees — 

As  compensation   on   basis   of  stockholdings  not 

deductible,  why T.  R.  119 

For   pension    or   on   account   injuries,    deductible 

expense    T.  R.  120 

Assessment — 

Insurance  company,  reserve,  definition T.  R.  147d 

On  stock T.  D.  2090 

To  be  paid  when St.  G(c) 

Bad  debts,  deductible,  when T.  R.  125 

Banks,  etc. — 

Interest  paid  on  deposits,  etc.,  allowable  deduction.     T.  R.  149 
Paying  taxes  assessed  against  their  stockholders, 

deductible  status  of T.  R.  154 

Bonds   T.  D.  1992 

Bookkeeping    A57 

Books  of,  subject  to  examination,  by  whom,  for  what, 

result  T.  R.  186 

Capital    p.  253 

Carrying  charges  p.  280 

Cemetery,  taxable  status  depends  on  what T.  R.    90 

Certificates  of  ownership  by  claiming  exemption,  form 

of  and  how  executed T.  R.    45 

Change  in  book  value  of  capital  assets  by  annual 
adjustment  on  books,  that  value  to  be  carried  into 

return    T.  R.  Ill 

Change  in  book  value  of  capital  assets  by  reappraisal, 

gain  or  loss,  how  computed T.  R.  Ill 

Change  of  name T.  D.  2137 

Charitable,  exempt,  when St.  G(a) 

Classes,  enumeration  of T.  R.  162 

Close    p.  287 

Collector  to  furnish  blanks  for  return  of T.  R.  163 

Collecting  foreign  income,  to  have  license St.  E 

Commissions  to  salesmen  paid  in  stock,  deductible  ex- 
pense when    T.  R.  117 

Complete  return  to  be  made  by  or  will  not  be  accepted.     T.  R.  163 
Contract  with  by  State,  etc.,  prior  to  passage  income- 
tax  act,  income  from  accruing  to  individual,  subject 

to  tax T.  R.    93 

Contract  with  by  State,  etc.,  prior  to  the  passage  of 
income-tax  act,  income  from  accruing  to  State,  etc., 
exempt  from  tax  when T.  R.    93 


Index  395 

Corporations — Continued. 

Cost  of  buildings  on  leased  ground,  deductible  as  rent, 

when    T.  R.  115 

Dairies,  cooperative,  not  subject  to  tax,  what T.  R.    92 

Debts    deductible  A25 

Deductible  loss  denned A24 ;  T.  R.  124 

Deduction  account  interest  on  indebtedness  limited.. 

A22;  T.  R.    81 
Deduction — 

Account  materials  and  supplies  on  hand,  what..  T.  R.  123 
For  depletion   of  mines   regulation   and   rate   of, 

limit  of   T.  R.  142 

For  depreciation   of  natural   deposits,   basis   and 

limit  of  T.  R.  141 

For  depreciation    on    patent,    what,    how    deter- 
mined       T.  R.  137 

For  depreciation  on  timberlands,  limit  of,  excess 

of,  is  income T.  R.  140 

For  interest    paid    at    different    rates,    rule    of 

application    T.  R.  151 

For  obsolescence    of    patents,    what,    how    deter- 
mined       T.  T.  138 

Denned    T.  R.    78 

Depreciation    timberland    from    removal    of    timber, 

amount,   how   determined T.  R.  139 

Depreciation  (A26)  — 

Deductible,  amount,  how  treated T.  R.  130 

Defined    T.  R.  129 

For  amortization  allowed,  when,  how T.  R.  135 

How    determined   T.  R.  129 

Reserve,  use  of,  disposition  excess  of T.  R.  132 

Dividends  not  deductible p.  255 

Dissolved    p.  254 

Division  of  depreciation  of  reserve,  correction T.  R.  133 

Domestic  dairy,  foreign  business p.  279 

Donation  for  charitable  purposes,  deductible  when...  T.  R.  121 

Duties  not  deductible  as  tax,  but  item  of  cost T.  R.  155 

Educational,   exempt,   when St.  G(a) 

Engaged  in  more  than  one  class  of  business,  gross  in- 
come   ascertained    in    accordance    with    applicable 

definitions  of  such  income T.  R.  112 

Every,  not  specifically  exempt,  required  to  make  re- 
turn of  income T.  R.    80 

Evidence  requisite  for  allowance  of  deductions T.  R.  158 

Excise  and  income  tax  for  1913  in  one  return.  .St.  S;  T.  R.  191 


396  Index 

Corporations — Continued. 

Excise  tax  on,  for  what  period,  how  computed 

All;  T.  D.  1937;   T.  R.  160 

Exempt  from  tax,  what  are T.  D.  2090;  A15; 

T.  D.  2137;  p.  297;  T.  R.    87 

Exempt,   owning  another,    liable p.  279 

Expense  of  operation  and  maintenance  to  be  shown 

in  return  St.  G(a) 

Includes  what  T.  R.  114 

Expense  in  connection  with  salary T.  D.  2137 

Failure  to  receive  blanks  will  not  excuse  from  making 

returns,  or  from  penalties  for  such  failure T.  R.  163 

Firms,    etc.,    withholding    normal    tax    on    behalf    of 

others     T.  R.      9 

Fiscal  year  of,  how  established,  what  to  do.T.  D.  2001;  T.  R.  165 

Illustration  of  and  what  to  do T.  R.  166 

Foreign,  normal  lax  on  business  in  United  States. ...  St.  G(a) 
Coupons,  checks,  bills  of  exchange,   etc.,  normal 

tax  deducted  from,  when St.  E 

Dividends    on    stocks    of,    normal    tax    deducted 

when   St.  E 

Doing  business  by  agent  p.  282 

Having  more   than   one  branch   office   in   United 
States  to  designate  principal  office  and  person 

to  make  return  T.  R.    83 

Interest  on  indebtedness  to  be  deducted,  what. ...  St.  G(c) 

To  give  amount  of  bonded  and  other  indebtedness.  St.  G(c) 

To  set  forth  paid-up  capital  stock St.  G(c) 

Form  of  return  prescribed  for T.  R.  163 

General   expense   foreign   steamship    companies,   how 

treated   T.  R.  116 

Gifts  or  gratuities  to  employees  not  deductible T.  R.  120 

Good-will,  depreciation  not  allowed  in  connection  with.  T.  R.  136 
Gross  income — ■ 

Definition  of   T.  R.    96 

General  definition    T.  R.  107 

Gross  value  at  the  mines,  definition  of T.  R.  142 

Holding  corporations   pp.  255,  290 

In  addition  to  deduction  for  depletion  of  mines,  etc., 

deduction  for  depreciation  of  plant,  what,  basis  of.  T.  R.  143 
Income — 

Excepted  during  the  year T.  R.    15 

From  sale  of  capital  assets,  how  determined T.  R.  108 

How  ascertained  St.  G(b) 

Losses  from St.  G(b) 


Index  397 

Corporations — Continued. 

Indebtedness,  return  of p.  286 

Insurance  company  i  A43) — 

"Deductible  net  addition  to  reserve,"  definition: 
what  basis  of  computation  of;  what  not  to  be 

included  in T.  R.  147d 

Deduction  claims  actually  paid  under  policy  con- 
tract      T.  R.  147c 

Depreciation  loss  by  shrinkage  in  property  value. 

what  and  when  deductible T.  R.  147b 

Gross  income  of,  definition  of T.  R.  97, 101 

Losses,  deductions  for,  what T.  R.  147a 

Reserve  to  meet  losses,  how  treated T.  R.  147e 

Salvage,  how  to  be  treated  in  return  of T.  R.  147c 

Interest  paid — 

As  rental,  how  treated T.  R.  148 

By,  on  mortgage  on  property  in  which  corporation 

has  equity  or  is  purchasing T.  R.  148 

Deduction,  what,  when  T.  D.  1960 ;     T.  R.  148 

On  debts  secured  by  collateral  subject  to  sale,  de- 
ductible, when,  why   T.  R.  150;   T.  D.  1993 

On  deposits,  etc.,  deductible,  when T.  R.  113 

Inventory,  purpose  and  use  of;  kinds  of T.  R.  161 

Leased,  to  make  its  own  return T.  R.    82 

Leasing  oil  or  gas  territory,  deductions  for  depletion, 

basis  of  T.  R.  144 

Lessee,  property  of.  assuming  indebtedness  of  lessor, 

return  by  lessee,  what T.  R.    81 

Lessee,  not  to  include  capital  stock  or  debts  of  lessor 

in  return,  except T.  R.    82 

Life  insurance   A30 

Life  Insurance  Coup  ant  (A43) — ■ 

Applied  surrender  values  and  consideration  for 
supplementary  contracts  both  added  and  de- 
ducted in  return  T.  R.  102 

Deductions  from  gross  income,  what T.  R.  100 

Gross  income,  definition  of T.  R.  101 

Supplementary  statement  attached  to  return  of, 

showing  what     T.  R- 103 

Liquidation  of,  make  final  return  of  what;  filed  when 

and  where T.  R.    85 

Lodge  System."  defined   T.  R.    89 

Loss — 

Actual,  sustained  St.  G(b) 

Sustained  during  year St.  G(c) 


398  Index 

Corporations — Con  tinned. 
Loss — Continued. 

From  removal  of  buildings,  not  deductible,  why..  T.  R.  127 

From  sale  of  capital  assets,  how  ascertained T.  R.  128 

Securities  below  par,  how  treated T.  R.  135 

Making  false  return,  penalty  for St.  F 

May  designate  day  to  pay  tax St.  G(c) 

Manufacturing  company,  gross  income,  definition....  T.  R.  104 

Mercantile  company,  gross  income,  definition T.  R.  105 

Miscellaneous,  gross  income,  definition T.  R.  106 

Mutual  companies  making  return,  definition  of  net  in- 
come    T.  D.  1993;   T.  R.    80 

Mutual  fire  insurance  company — 

Gross  income,  definition T.  R.    98 

Supplementary     statement    attached     to     return, 

showing,  what T.  R.  103 

Mutual  marine  insurance  company — 

Deductions  from  gross  income,  what T.  R.    99 

Supplementary  statement  attached  to  return  of, 

showing  what   T.  R.  103 

Will  deduct,  what T.  R.  147d 

Neglecting  to  make  return,  penalty  for St.  F 

Net  income — 

Annual,  normal  tax  on St.  G.(a)  ;  A16;  A27 

Defined  A20 

Engaged   in   more  than   one  class  business,   how 

ascertained    T.  R.  113 

For  1913,  how  ascertained T.  R.  159 

From  all  sources  St.  G(b) 

From  sale  of  capital  assets,  how  determined T.  R.  109 

Of,  should  be  what T.  R.  158 

Of,  which  is  distributable  to  owners  thereof;  sub- 
ject to  tax T.  R.    79 

Preceding  calendar  year,  normal  tax  on St.  G(a) 

To  be  shown  on  return St.  G(c) 

No  specific  exemption  from  tax  on  corporations. .  .A27;  T.  R.  160 
Notice — 

Given  of  assessments  made St.  G(c) 

Of  fiscal  year,  not  retroactive T.  R.  169 

Not  receiving  blank  for  making  return,  should  make 

application  for,  to  whom,  when T.  R.  163 

Not  transacting  business p.  260 

Not  completely  organized   p.  297 

Not  to  include  taxes  paid  in  foreign  countries  in  in- 
come; see  seventh  deduction St.  G(c) 

Obligations  of,  defined pp.  235,  237 


Index  399 

Corporations — Continued. 

Officers  of,  making  false  return,  penalty St.  F 

Only  one  return  and  assessment  for  1913 T.  R.  160 

On  what  taxed;  what,  and  amount  of St.  G(a) 

Operating  mines,  oil  or  gas  wells,  on  royalty  basis,  not 

allowed,  deduction  for  depletion  of  deposits T.  R.  145 

Operations  of,  etc.,  unlawful  to  divulge.     Section  3167  St.  I 
Organized — 

During  the  year,  to  make  return  of  what T.  R.    84 

Elsewhere  than  in  United  States,  subject  to  tax  on 

what  T.  R.    77 

In  United  States  and  certain  exempt,  interest  on 
bonds  payable  to,  tax  not  to  be  withheld  if  cer- 
tificate of  ownership  filed T.  R.    45 

Paid-up  capital  stock,  definition  of p.  259;  T.  R.    95 

Partnership — - 

Limited,  is,  and  subject  to  corporation  tax T.  R.    86 

Ordinary,  not  subject  to  tax  as T.  R.    94 

Payments  on  account  of  tax  from  covenant  in  bonds, 

not  deductible  in  ascertaining  net  income T.  R.  113 

Penalty  for — 
Failure  to 

Make  return  St.  G(c) ;  T.  R.  163 

Pay  tax  by  June  30 St.  G(c) 

Refusal  to  make  return St.  F 

Profit  or  loss  on  sale,  capital  assets,  how  determined. .  T.  R.  110 
Public  utility,  governmental   function,  income  accru- 
ing through,  to  State,  exempt  from  tax T.  R.    93 

Railroad   whose  income  paid   by   its   lessee  direct  to 

stockholders  must  make  return  of  income T.  R.    80 

Religious,  exempt   St.  G  ( a ) 

Repairs  may  be  deducted,  what T.  R.  131 

Reserve  for — 

Insurance  of  own  property  not  deductible T.  R.  122 

Losses,  not  deductible T.  R.  126 

Taxes  not   deductible T.  R.  156 

Residence  of   p.  236 

Return — 

For  1913  must  be  on  new  form  and  not  on  excise 

form  heretofore  used T.  R.  172 

To  be  made,  when T.  R.  190 

When  available   St.  G(d) 

When  State  officers  may  have  access  to St.  G(d) 

When  to  be  made.     Section  3173 St.  I ;   p.  261 

Shrinkage  in  value,  capital  assets,  how  treated T.  R.  134 


400  Index 

Corporations — Continued. 

Special  excise  tax,  how  computed, St.  S 

Status  for  taxation  purposes  to  be  established,  how.  .  T.  R.    88 

Subsidiary  companies    pp.  290,  293 

Subject  to  tax — 

Classes  enumerated St.  G (a) 

Normal  only,  but  on  entire  net  income T.  R.  185 

Special  excise,  under  act  August  5,  1909 St.  S 

Taxable  status  in  doubt,  must  make  return  and  attach 

thereto  statement  showing  what T.  R.    91 

Tax — 

Computed  on  net  income  of T.  R.  159 

Deduct  amount  paid  for St.  G(c) ;   A23 

Paid  by — 

Constitute  deduction,   when T.  R.  152 

When  not   deductible T.  R.  153 

To  be  assessed  by  Commissioner  of  Internal  Reve- 
nue, when.     Section  3176 St.  I 

Tenant  corporation  expense p.  282 

To  give  notice,  day  designated  for  return St.  G(c) 

Make  list  or  return,  how,  when.     Section  3173 St.  I 

Unearned  increment,  not  value  for  depreciation  pur- 
poses    T.  R.  146 

United  States,  filing  certificates  of  ownership,  exempt 

from  withholding  of  foreign  items T.  R.    60 

When  to  make  return St.  G(c) 

Cost: 

Of  buildings  on  leased  ground,  deductible  as  rent  of 

corporation,  when    T.  R.  115 

Costumes    T.  D.  2090 

D 

Dairies  : 

Cooperative,  not  subject  to  tax,  what T.  D.  1996;   T.  R.    92 

Damages   T.  D.  2135 

Debtor: 

Annual — 

List  return  by,  when  and  what T.  R.    50 

Return  by,  to  show  totals  only  of  monthly  list 

return  T.  R.    51 

Definition  of   T.  R.    38 

How  to  treat  substitute  certificate  of  collecting  agent 
and  certificate  of  owner  not  subject  to  having  tax 
withheld    T.  R.    51 


Index  401 

Debtor — Continued. 

Interest  on  bonds  due,  corporations  organized  in 
United  States  and  certain  exempt,  not  to  withhold 
tax  if  certificate  filed T.  R.    45 

In  United  States  (or  its  withholding  agent)  charged 
with  duty  of  withholding  from  coupons  or  registered 
interest    T.  R.    39 

In  United  States,  duty  of,  before  payment  of  registered 
interest    T.  R.    41 

Maker  of  note  given  in  payment  of  interest  held  re- 
sponsible for  tax  on T.  R.    68 

May  appoint  withholding  and  paying  agent  to  act  for 
it   T.  R.    38 

Note  given  in  payment  of  income,  maker  of  note  is. .     T.  R.    68 

Not  to  withhold  against  nonresident  alien  or  foreign 

organization  doing  business  in  United  States,  when.     T.  R.    46 

Not  to  withhold  when  receiving  certificate  of  collect- 
ing agent  that  tax  withheld  by  same,  disposition  of 
certificate    T.  R.    52 

Return  of  withholding  by,  where  to  be  filed T.  R.    38 

When  source  for  withholding  purposes T.  R.    31 

Debts  : 

Interest  on    A22;   T.  R.  125 

"Deductible  net  addition  to  reserve": 

Insurance  company;  definition;  what  basis  of  compu- 
tation of;   what  not  to  be  included  in T.  R.  147d 

Deductions  (A21-29;  T.  D.  2090): 

Account  partnership  expense,  account  of  and  form  for 

claiming    T.  R.    47 

Additions   and    betterments   constituting   increase   in 

capital  investment,  not T.  R.  118 

Allowance  for  in  computing,  what,  when St.  B 

Amount  of,  to  ascertain  net  income St.  B 

At  source,  applies  to  normal  tax  only St.  E 

Bad   debts  of  corporation,   when T.  R.  125 

Basis,  for  depletion  leased  oil  or  gas  territory T.  R.  144 

Claims  for — 

Filed  with  collector,  withholding  agent  to  be  fur- 
nished statement  of T.  R.    33c 

May  be  filed  with  withholding  agent,  when T.  R.    33c 

Not  allowed  unless  made,  when St.  E 

Commission  to  salesmen  paid  in  stock  of  corporation 
is,  when  T.  R.  117 


402  Index 

Deductions — Continued. 

Compensation,   officers  and   employees  of  State,   etc., 
except,  when;  judges  Federal  courts  now  in  office; 

present  President  for  present  term St.  B 

Compensation  paid  employees  of  corporation  based  on 

stockholding,   not,   why T.  R.  119 

Corporation — 

Account  interest  paid  on   debt,   limited  to  what, 

when  T.  R.    81 

Depreciation,  amount,  how  treated T.  R.  130 

Donations  for  charitable  purpose,  when T.  R.  121 

Evidence  requisite  for  allowance  of T.  R.  158 

For  interest  paid  at  different  rates,  rule  of  appli- 
cation       T.  R.  151 

Gifts  or  gratuities  to  employees,  not T.  R.  120 

Materials  and  supplies  on  hand,  what T.  R.  123 

Pensions  and  damages  for  injuries  to  employees, 

are T.  R.  120 

Reserve — 

For  insurance  its  own  property,  not T.  R.  122 

To  meet  losses  insurance  companies,  not T.  R.  147C 

Status  of  tax  for,  to  bank,  assessed  against  stock- 
holder, paid  by  bank T.  R.  154 

And  exemptions  in  certain  cases St.  E 

Debts  due  taxpayer,  ascertained  worthless  and  charged 

off  in  year St.  B 

Depletion  of  mines,  regulation  of  rate  of,  limit  of T.  R.  142 

Depreciation — 

Defined   A26;   T.  R.  129 

For  amortization,  allowed  when,  how T.  R.  135 

How   determined    T.  R.  129 

Loss  by  shrinkage  in   property  value,  insurance 

company,  what  and  when T.  R.  147d 

Of  good-will  not  allowable T.  R.  136 

Of  natural  deposits,  basis  and  limit  of T.  R.  141 

Of  plant   (in  addition  to  deduction  for  depletion 

of  mine) ,  what,  and  basis  of T.  R.  143 

On  patent,  what,  how  determined T.  R.  137 

Reserve,  how,  disposition  excess  of T.  R.  132 

Timberland — 

Limit  of,  excess  of,  is  income T.  R.  140 

Removal  of  timber,  amount,  how  determined     T.  R.  139 

Unearned  increment,  not  value  for  purpose  of . . . .     T.  R.  146 

Dividends  on  stock,  what,  when p.  255;   St.  B 


Index  403 

Deductions — Continued. 

Exemption  under  paragraph  C,   not  allowed  nonresi- 
dent alien  St.  B 

False  statement  in  regard  to,  penalty St.  E 

For  ascertaining  net  income,  what T.  R.      3 

For  expense  of  business,  partnership  may  claim,  when 

and  how T.  R.    14 

For  fire,  storm,  shipwreck St.  B 

For  restoring  property,  etc.,  none St.  B 

Foreign  corporation,  to  ascertain  net  income T.  R.  157 

From  gross  income — 

Mutual  marine  insurance  companies,  what T.  R.    99 

Of  nonresident  alien,  what T.  R.      8 

To  ascertain  net  income,   for  normal   tax,   para- 
graph  B,  what T.  R.      6 

From   net   income   to   ascertain   taxable,    exemption, 

paragraph  C T.  R.      6 

From  premiums,  etc.,  by  whom  made,  when St.  E 

Increase  value  of  property,  none St.  B 

Insurance  company — 

Claims  actually  paid  under  policy  contract,  are. . .   T.  R.  147c 

Losses,  what   T.  R.  147a 

Interest  on  obligations,  State  or  political  subdivision 

of,  and  of  United  States  or  possession St.  B 

Interest  paid  by — 

Bank,  etc.,  on  deposits,  etc.,  is T.  R.  149 

Corporation — 

As  rental,  not  allowable T.  R.  148 

Is,  what,  when T.  R.  148 

On  indebtedness  secured  by  collateral  subject 

to  sale,  when,  why T.  R.  150 

On  mortgage  on  property  in  which  corpora- 
tion has  equity,  is  an  amount  of T.  R.  148 

Joint-stock  company   St.  B 

Life  insurance  company — 

From   gross   income,   applied   surrendered   values 

and  consideration  for  supplementary  contracts     T.  R.  102 

From   gross   income,   what T.  R.  100 

Loss — 

During  year  St.  B 

From  removal  of  building  not  deductible,  why. .  .     T.  R.  127 
From  sale — 

Capital  assets,  how  ascertained T.  R.  128 

Corporation  securities  below  par,  how  treated     T.  R.  135 
Which  corporation  may  make,  defined T.  R.  124 


404  Index 

Deduction  s — Continued. 

May  be  claimed  account  tax  on  note  given  in  payment 

of  income   T.  R.    68 

Mutual  marine  insurance  company,  what T.  R.  147d 

Not  compensated  by  insurance  or  otherwise St.  B 

Notice  to  be  filed  for St.  E 

Obsolescence  of  patents,  what,  how  determined T.  R.  138 

Only,  claim  for,  may  be  filed  with  collector,  when. ...   T.  R.    33c 

Paid  for  new  buildings,  none St.  B 

Paragraph  B — 

For  normal  tax  only,  7  and  8  included  for  purpose 

of  additional  tax   T.  R.      6 

May  be  claimed  in  case  of  fixed,  determinable  an- 
nual income  T.  R.    66 

Not  claimed  of  withholding  agent  in  time,  only 

remedy,  application  for  refund T.  R.  33c 

When   claim   for    (Form   1008),   to  be  filed   with 

withholding  agent  or  collector T.  R.  33b 

Permanent  improvements  or  betterments,  none St.  B 

Property  owned,  business  carried  on  in  United  States, 

person  residing  elsewhere,  what St.  B 

Repairs,  when   T.  R.  131 

Reserve  for  losses,  not T.  R.  126 

Single  person,  amount  allowed St.  C 

Tax,  income,  paid T.D.  2135 

Tax  withheld,  when St.  B 

Taxes  paid  by  corporation — 

Are,   when    T.  R.  152 

When  not   T.  R.  153 

To  ascertain  net  income  corporation  engaged  in  more 

than  one  class  of  business T.  R.  113 

Deeds  of  trust,  etc.: 

Corporation,  income  from,  subject  to  withholding  at 

source  regardless  of  amount,  when St.  E 

Delinquent: 

Tax  becomes,  if  not  paid  by  June  30 T.  R.    25 

Depletion: 

Deduction   for,  mines,   oil   or   gas   wells  operated   on 

royalty  basis,  not  allowed  operating  corporation..  T.  R.  145 
Leased  oil  or  gas  territory,  basis  for  deduction  for. . .  T.  R.  144 
Of  mines,   etc.,   regulation   of  rate  of  deduction   for, 

limit  of   T.  R.  142 

Deposit  : 

Certificate  of,  interest  on,  part  of  gross  income T.  R.      4 


Index  405 

Deposit — Continued. 

Interest  on,  not  subject  to  withholding;   must  be  in- 
cluded in  personal  return  whether  paid  or  not T.  R.    67 

Interest  on,  part  of  gross  income T.  R.      4 

Depreciation  : 

Corporation,  defined   A26;   T.  R.  129 

Deductible,   amount  how  treated T.  D.  2005;   T.  R.  130 

Deduction  for  (T.  D.  2137)  — 

Of  natural  deposits,  basis  and  limit  of T.  R.  141 

Of  plant   (in  addition  to  deduction  for  depletion 

of  mine),  what,  and  basis  of T.  R.  143 

On  patent,  what,  how  determined T.  R.  137 

Diversion   reserve   for,   correction T.  R.  133 

For  amortization,  allowed  when,  how T.  R.  135 

Fund  for  reserve p.  286 

Gross  value  at  the  mine,  defined T.  R.      6 

How  established  in  case  of  mines T.  R.      6 

Loss  by  shrinkage  in  property  value,  insurance  com- 
pany, what,  and  when  deductible T.  R.  147b 

No  fixed  rating p.  298 

Of  good-will  not  allowable  deduction T.  R.  136 

Timberland— 

From  removal  timber,  amount,  how  determined . .     T.  R.  139 

Deduction  for,  limit  of,  excess  of  is  income T.  R.  140 

Unearned  increment,  not  value  for  basis  of  deduction 

for  T.  R.  146 

Depreciation  reserve: 

Use  of,  disposition  excess  of T.  R.  132 

Deputy  Collector: 

Ascertain  persons  liable  to  tax  and  enumerate  objects, 

section  3172   St.  I 

Legality  of  returns  made  by,  section  3176 St.  I 

To  make  report,  false  or  fraudulent  return,  how,  sec- 
tion 3176  St.  I 

Descent: 

Of  property — 

Income  from,  part  of  gross  income T.  R.      4 

Value  of,  not  income T.  R.      4 

Devise  of  property: 

Income,  part  of  gross  income;  value  of,  not  income. . .     T.  R.      4 

Direct  Taxation    A7 

Dispatch  of  business: 

In  collector's  office T.  R.  195 

District  of  Columbia: 

Exemptions,  proviso  G(a) 


400  Index 

Diversion: 

Depreciation  reserve,  correction T.  R.  133 

Dividends  (A49;  T.  D.  2274): 

Compensation  paid  employees  of  corporation  based  on 

stockholding  are,  when T.  R.  119 

Cooperative  dairies,  is  purchase  price  of  raw  material     T.  R.    92 

Deducted  from  net  income,  when T.  D.  1945;   T.  R.      3 

Not  deductible  by  corporation pp.  255,  281 

Of  corporations  subject  to  tax  not  subject  to  withhold- 
ing    St.  E 

Part  of  gross  income T.  R.      4 

Stock    foreign    corporations,    subject    to    withholding 

when  St.  E 

Stock  subject  to  tax — individual  owning,  how  treated, 

St.  D;  T.  D.  2090;  T.  D.  2135 

To  aliens,  not  taxable T.  D.  2017 

Doctors  : 

Fees  of,  indefinite  or  irregular  not  subject  to  with- 
holding    A47-,  T.  R.    32 

Donations  : 

By    corporation    for    charitable    purpose,    deductible 

when    T.  R.  121;   T.  D.  2090 

Domestic  building  and  loan  association: 

Definition,  what  necessary  to  exempt  from  tax T.  R.    87 

Due  date: 

Return  on  Sunday  or  legal  holiday,  effect  of T.  R.  176 

Duties: 

Not  tax  and  not  deductible,  but  are  item  of  cost T.  R.  155 


E 

Educational  corporations: 

Exempt,  when St.  G(a) 

Emergency  revenue  law: 

Not  to  apply  to  income-tax  certificates T.  D.  2049 

Employees  : 

State  or  political  subdivisions,  compensation  of  offi- 
cers and  employees  paid  by,  not  part  of  gross  income    T.  R.      5 
State   officers   or   employees,    compensation   paid   by 

United  States  a  part  of  gross  income T.  R.      5 

Endowment: 

Money  paid  for;  returned,  not  to  be  included  in  gross 

income  T.  R.      5 

Entertaining  as  expense p.  256 


Index  407 

Evidence: 

Furnished  by   agent  of  authority  to  sign  ownership 

certificate  to  be  retained  by  verifying  agent T.  R.    43 

Guardian,  etc.,  served  with  notice  for  failure  to  make 

return,  may  furnish,  what T.  R.    18 

Of  nonliability  to  payment  of  tax,  filed  with  withhold- 
ing agent,  may  be  forwarded  to  collector  in  lieu  of 

tax  Preface  to  Part  III 

Requisite  for  allowance  of  deduction  by  corporation. .     T.  R.  158 
Excise  and  income: 

Tax,  corporation,  1913  in  one  return T.  R.  191 

Excise  tax  (T.  D.  1937;  T.  D.  2130) : 

Corporation    All ;    St.  S ;   T.  R.  160 

Executor: 

Is  fiduciary,  when T.  R.    70 

Make   return   of   income   of   deceased   within   taxable 

year,  when  and  what T.  R.    17 

Return  T.  D.  2090;   T.  D.  2152 

Exempt: 

From  tax — 

Cooperative  dairies,  what T.  D.  1996 ;   T.  R.    92 

Corporations,  what  A15;   T.  D.  1967;   T.  R.    87 

Income  from  public  utility T.  R.    93 

Exemption: 

Allowed  in  computing  taxable  income  of  deceased  per- 
son, when  T.  R.    17 

Amount  allowed  married  person A58;   T.  D.  2135;   St.  C 

Beneficiary  may  claim  from  fiduciary T.  R.    74 

Boards  of  trade,  when St.  G(a) 

And  deductions  St.  E 

Cemetery  company,  depends  on  what T.  R.    90 

Certificate     claiming    by     corporation     organized     in 

United  States,  form  of  and  how  executed T.  R.    45 

Certificate  claiming,   what  must  show  and   how  exe- 
cuted       T.  R.    42 

Chambers  of  commerce,  when St.  G(a) 

Charitable  associations,  when St.  G(a) 

Civic  leagues  or  organizations,  classes  of,  when St.  G(a) 

Claimed  by  fiduciary,  forms  1015  or  1019 T.  R.    70 

Claimed  for — 

By  whom,  with  whom  and  when  to  be  filed. .  .  St.  E;   T.  R.    41 

How  to  be  filed St.  B 

May  be  filed  with  withholding  agent  when T.  R.  33c 

Under  paragraph  C — 

Allowed  to  person  permitted  to  claim T.  R.    60 


408  Index 

Exemption — Con  tinned. 

Claimed  for — Continued. 

Under  paragraph  C — Continued. 

Failure  to  claim,  effect  of T.  R.    65 

Corporation  claiming — 

To  establish  rights  to,  ho w T.  R.    88 

Whose  taxable  status  in  doubt,  must  make  return 

and  attach  statement  showing  what T.  R.    91 

District  of  Columbia,  provisions St.  G(a) 

Domestic  building  and  loan  associations St.  G(a) 

Educational  corporation,  when St.  G(a) 

False  claim  or  statement  as  to,  penalty  for T.  R.  33a 

Fraternal  societies St.  G(a) 

Husband  and  wife  (A52)  — 

Living  together,  citizen  or  resident  alien,  add  in- 
comes for  purpose  of,  amount  of T.  R.    10 

Separated  and  living  permanently  apart,  citizen 

or  resident  alien,  each  entitled  to  $3,000 T.  R.    10 

Individual — 

Amount  of  for  1913 T.  R.      7 

Deduction  of  from  net  income  to  ascertain  taxable     T.  R.      3 
Single,  or  married  but  not  living  with  husband  or 

wife,  may  claim  $3,000  each St.  E 

May  be  claimed,  note  given  in  payment  of  income. ...     T.  R.    68 

Mutual  cemetery  companies St.  G(a) 

None  for  corporations T.  R.  160 

Paragraph  C — 

Not  allowed  nonresident  alien T.  R.      8 

Not  claimed  of  withholding  agent  in  time,  only 

remedy  application  for  refund T.  R.  33c 

To  be  filed  with  withholding  agent  when T.  R.    33 

Philippine  Islands  St.  G(a) 

Porto  Rico  St.  G(a) 

Public  utility   St.  G(a) 

Religious  associations  and  corporations St.  G(a) 

Scientific  associations,  when St.  G(a) 

Status  of  person  claiming  determined  as  of  time  of 

claim    T.  R.    10 

To  be  deducted  from  net  income  to  ascertain  taxable     T.  R.      6 
Expense  (A21) : 

Deductible,   pension   or   amounts   paid   employees   ac- 
count injuries  are T.  R.  120 

General,  foreign  steamship  companies,  how  treated. . .     T.  R.  116 

Of  manufacture   pp.  287,  298 

Of    operation    and    maintenance    corporate    business, 

what  includes   T.  R.  114 


Index  409 

Expense — Continued. 

Partnership  may  claim  deduction  for,  when  and  how     T.  R.    14 

Rent  paid  by  tenant T.  D.  2090 

Explanation  of  law pp.  1-39 

Extension  : 

Time  for  filing  return,  when,  what,  how T.  R.    23 

To  make   return,   not  exceed   what,   how   and   to 

whom  made   T.  R.  173 

P 

False  returns: 

Additional  tax  imposed   St.  E 

Or  fraudulent,  penalty St.  G(d) 

Farming   A51;  T.  D.  2153 

Fees,  professional A47 

Fiduciary  (A33;  T.  D.  2231;  T.  D.  2267): 

Annual  return  by,  what  to  show  and  how  executed, 

T.  D.  1943;   T.  R.    73 

Definition  of T.  D.  2135;  T.  R.  70;  p.  239 

Filing   notice    with   other   withholding   agent    (Form 

1015),  nothing  to  be  withheld T.  R.    70 

Having  withheld  and  paid  tax  on  undistributed  annual 
net  income  not  to  again  withhold  when  distribution 

made  T.  R.    75 

Income  of  beneficiary  not  distributed  during  the  year; 
what  to  be  shown  in  return;  tax  to  be  withheld  and 

paid  when T.  R.    74 

May  be  appointed  agent  or  attorney  for  the  purpose  of 
making  personal  return  of  income  (Form  1040)  for 

beneficiary  T.  R.  72;  p.  239 

Optional  claim   (Form  1015  or  1019) T.  R.    70 

Regulations  as  to T.  D.  1961;  T.  R.  70-75 

Return  by  must  be  made,  when p.  278;  T.  R.    71 

Return  by  to  include  only  matter  within  scope  of  au- 
thority        T.  R.    72 

Return  of  not  to  include  income  on  which  tax  paid..     T.  R.    71 

Return,  when  to  be  made T.  R.  190 

To  make  annual  return   (Form  1041)   to  collector  of 

district,  when,  to  show  what T.  R.    71 

Filling  in  number  of  bonds,  etc T.  D.  2022 

Pines  A40 ;  T.  D.  2015 

Firm: 

Collecting  foreign  items,  license  required St.  E 

To  make  return,  how,  when,  section  3173 St.  I 

Fiscal  agent,  defined T.  D.  2006 


410  Index 

Fiscal  year: 

Corporation  (A15;  T.  D.  2001;  T.  D.  2029)  — 

Duty  of  collector  upon  receiving  notice  of T.  R.  167 

How  established,  what  to  be  done T.  R.  165 

Illustration  of  and  what  to  do T.  R.  166 

Making  return  on  basis  of  but  not  so  designating, 
return  not  accepted  and  must  be  made  for  cal- 
endar year   T.  D.  2090;   T.  R.  171 

New  corporations p.  283 

Notice  of  not  retroactive T.  R.  169 

Notice  to  collector  not  given  in  prescribed  time, 

calendar  year  to  govern T.  R.  168 

Not  properly  established,  return  to  be  made  for  what 

calendar  year  and  filed  when T.  R.  170 

Foreign  : 

Bonds  T.  D.  1992 

Collections  A55;  T.  D.  2023 

Corporation  (A34;  T.  D.  2006)  — 

Doing  business  in  United  States — 

Provision  for T.  D.  2161;   St.  G(b) ;   T.  D.  2090 

Return  by St.  G(c) 

Particulars  of  St.  G(c) 

Where  filed   St.  G(c) 

Income  tax  in  foreign  countries p.  294 

Subject  to  tax  on  what T.  R.    77 

Tax  on  net  income;  net  income  defined;  deduc- 
tions to  ascertain T.  R.  157 

Income  paid  in  United  States,  provisions  for  collection 

of  tax  on A55;  T.  R.  54-62 

Items — 

License  required  for  collection  of,  when  and  from 

whom   T.  R.    54 

Provisions  for  collection  of  tax  on  apply  wherever 

said  items  payable,  if  paid  in  United  States. ...     T.  R.    61 
Too  small  for  notation  on,  statement  of  facts  may 

be  attached  to T.  R.    58 

Organization  doing  business  in  United  States  subject 
to  tax  but  exempt  from  withholding  upon  filing  cer- 
tificate claiming  (Form  1018) T.  R.    46 

Partnership  owning  bonds  of  corporations  organized 
or  doing  business  within  United  States,  not  subject 

to  withholding  on  interest  of,  when T.  R.    48 

Payments  of  dividends,  etc.,  provisions  as  to  collec- 
tion, license,  penalty St.  E 

Steamship  company,  general  expense  of,  how  treated.  .     T.  R.  116 


Index  411 

Forms  (A53,  pp.  340-365): 

Aliens,  certificate  for. . '. T  D.  1977, 1988, 1976 

Banks,  etc.,  stamping  name T.  D.  1986 

Certificates,  ownership,  amended T.  D.  1974 

Exemption    T.  D.  1976 

Exemption  at  service T.  D.  1998 

Fiduciaries  T.  D.  1943, 1976 

For  corporations   p.  341 

For  individuals p.  355 

Ownership T.  D.  1976 

Substitute  certificates  T.  D.  1976 

Withholding  monthly  list T.  D.  1973 

Fraudulent  leturn: 

Additional  tax  imposed;   time  limit  for  paying  after 
notice  St.  E 

G 
Gains: 

For  taxable  purposes  arising  or  accruing  within  calen- 
dar year,  part  of  gross  income,  what T.  R.      4 

Gas  or  oil  territory  leased: 

Corporation,  basis  of  deduction  for  depletion  of T.  R.  144 

Gas  or  oil  wells  and  mines: 

Operated  on  royalty  basis,  deduction  for  depletion  of 

deposits  not  allowed  operating  corporation T.  R.  145 

Gift  (A29) : 

Of  property,  income  from  part  of  gross  income;  value 

not  income  T.D.2090;     T.  R.      4 

To  corporation  is  income p.  257 

To  employees  of  corporation  not  deductible T.  R.  120 

Good- will: 

Corporation,  depreciation  of,  not  allowable  deduction, 

T.  D.  2137;   T.  R.  136 
Governmental  function: 

Income  accruing  to  State  from  exercise  of,  exempt. ...     T.  R.    93 
Gratuities: 

To  employees  of  corporation  not  deductible.  .T.  D.  2090;  T.  R.  120 
Gross  income: 

All  sources  to  be  specified St.  D 

Corporation — 

Definition  of  A18;   T.  R.    96 

Engaged  in  more  than  one  class  business,  ascer- 
tained in  accordance  with  applicable  definition 

each  class  T.  R.  112 

General  definition  of  gross  income T.  R.  107 


412  Index 

Gross  income — Continued. 
Corporation — Continued. 

Manufacturing  company,  definition  of T.  R.  104 

Mercantile  company,  definition  of T.  R.  105 

Miscellaneous  corporation,  definition  of T.  R.  106 

Deductions  from — 

By  mutual  marine  insurance  companies,  what. . .     T.  R.    99 
To   ascertain   net   income   for   normal   tax,   para- 
graph B  T.  R.      6 

Definitions T.  R.  3,  4 

Insurance  company,  definition  of T.  R.  101 

Life  insurance  company — 

Definition    T.  R.  101 

To  include  applied  surrender  values  and  consider- 
ation for  supplementary  contracts T.  R.  102 

Of  nonresident  alien,  what  constitutes T.  R.      8 

What  to  be  excluded  in  computing A19;   T.  R.      5 

Gross  value  at  the  mine: 

Corporation  definition  T.  R.  142 

Defined    T.  D.  2137;   T.  R.      6 

Guardian  (A33) : 

Is  fiduciary,  when T.  R.    70 

Return  made  by,  when,  regulation St.  D;   St.  G(c) 

H 
Heat  and  light: 

Allowance   T.  D.  2079 ;   T.  D.  2090 

History  of  income  taxes A3-14 

Holiday  : 

Due  date  of  return  falling  on,  effect  of T.  R.  176 

Horticultural  organizations: 

Exempt T.  D.  2090;   St.  G(a) 

Husband  (A52;  A58): 

Assumed  to  have  sufficient  knowledge  of  income  of 

wife  to  make  return  for T.  R.    10 

Having  net  income  other  than  wife's  income  from 
separate  estate  so  that  aggregate  income  both  more 
than  $4,000,  wife  return  attached  to  husband  or  his 
income    included    in    her    return    for    purpose    of 

$4,000  exemption T.  R.    10 

Should  make  return  of  income  for  self  and  wife T.  R.    10 

Husband  and  wife  (A52;  T.  D.  2090;  T.  D.  2137) : 

Both  jointly  and  separately  liable  for  return  and  pay- 
ment of  tax T.  R.    10 


Index  4:13 

Husband  and  wife — Continued. 

Combined  net  income  of,  exceeds  $4,000,  return  of 
must  be  made T.  R.    10 

Living  together,  citizen  or  resident  alien,  entitled  to 

$4,000  exemption  from  their  aggregate  net  income     T.  R.    10 

Not  living  apart,  having  separate  estates,  income  of 
both  may  be  made  on  one  return,  but  return  must 
show  income  of  each  separately  stated  with  name 
and  address  of  both T.  D.  2135;   T.  R.    10 

Separated  and  living  permanently  apart,  citizen  or 
resident   alien,   each    entitled   to    $3,000   exemption 

from  net   income T.  R.    10 

Husband  or  wife  (A52) : 

Either  having  net  income  of  $3,000,  return  required, 

and  must  include  incomes  of  both T.  R.    10 

I 

Identity: 

Persons  presenting  coupons  or  interest  orders  should 

be  required  to  establish T.  R.    52 

Income  tax: 

Theory  and  history Al-14 

Income: 

Additional  tax  on,  referred  to  as  additional  tax St.  A2 

Amount  from  which  withholding  to  be  had T.  R.    32 

Banks,  interest  paid  on  deposits  by,  to  be  deducted..  St.  G(c) 

Bonds  or  other  indebtedness St.  G(b) 

But  not  value  of  property,  acquired  by  gift,  bequest, 

devise   or   descent St.  B 

Compensation  of  officers  and  employees  of  State  or 
political  subdivision  of,  paid  by  United  States,  part 

of  gross  income T.  R.      5 

Corporation — 

Allowance  for  depreciation  by  wear  and  tear.  . ..  St.  G(b) 
Amount  allowed  for — 

Depreciation     St.  G(c) 

Taxes   St.  G(c) 

Bad  debts  collected  are T.  R.  125 

Prom  sale  of  capital  assets,  how  determined ....  T.  R.  108 

How  ascertained  St.  G(b) 

Interest  paid   deductible St.  G(c) 

Losses  sustained  during  the  year St.  G(c) 

May   designate  fiscal   year St.  G(c) 

Ordinary  expenses  of  operation   deductible St.  G(c) 


414  Index 

Income — Continued. 

Corporation — Continued. 

Penalty  for  failure  to — 

Make  return  of St.  G(d) 

Pay  tax  on  after  June  30 St.  G(c) 

To  give  notice  of  fiscal  year  adopted St.  G(c) 

Deductions    from    gross,    mutual    marine    insurance 

company,  what   T.  R.    99 

Derived  from  all  sources St.  G(a) 

Fixed  determinable  annual — 

From  what   derived T.  R.    63 

Normal  tax  on  bonds,  etc.,  when  deducted St.  E 

Withholding  from,  when T.  R.    64 

Foreign    corporation    doing   business    in    the    United 

States,  return  of,  particulars St.  G 

Foreign,  paid  in  United  States,  provisions  for  collec- 
tion of  tax  on T.  D.  2090;  T.  R.  54-62 

For  taxable  purposes — is  income  for  calendar  year..     T.  R.      4 

For  1913,  how  computed St.  G(c) 

From  all  sources  part  of  gross  income T.  R.      4 

From  bonds,  mortgages,  deeds  of  trust,  and  similar 
obligations  of  corporations,  etc.,  subject  to  withhold- 
ing at  source  regardless  of  amount T.  R.    37 

From  capital  invested  in  the  United  States St.  G(c) 

From  certain  professions  not  subject  to  withholding 

at  source T.  R.    32 

From  farming A51 

From  life  insurance A30 

From  sales  and  trades A50 

From  public  utility  or  governmental  function  accru- 
ing to  State,  etc.,  exempt  from  tax T.  R.    93 

From  what,  obligations  not  subject  to  tax  and  certifi- 
cate of  ownership  not  required T.  R.    37 

Gross  defined A18 ;     T.  R.  3,  4 

Corporation — 

Definition  of T.  R.    96 

Engaged  in  more  than  one  class  of  business, 
ascertained   in  accordance  with  applicable 

definition  for  each  class T.  R.  112 

General  definition   T.  R.  107 

Insurance  company,  definition  of  gross  in- 
come   T.  R.  97, 101 

Life  insurance  company,  to  include  applied 
surrender  values  and  consideration  for  sup- 
plementary contracts   T.  R.  102 


Index  415 

I  ncome — Continued. 

Gross  defined — Continued. 
Corporation — Continued. 

Manufacturing  company,  definition T.  R.  104 

Mercantile  corporation,  definition  T.  R.  105 

Miscellaneous  corporation,  definition T.  R.  106 

Mutual  fire  insurance  company,  definition  ...  T.  R.  108 

What  to  be  included  in  computing T.  R.      5 

Husband  and  wife,  what A52;  T.  R.    10 

Individual,  not  subject  to  withholding,  when T.  R.    32 

Insurance  company,  to  be  separately  stated St.  G(c) 

Insurance  reserve,  how  treated St.  G(b) 

Interest — ■ 

Accruing  during  year  St.  G(b) 

On  deposits St.  G(b) 

On  obligations  of  State,  etc T.  R.      5 

Joint-stock  companies,  how  ascertained  and  stated...  St.  G 
Life  insurance  companies,  what  included,  deductions, 

St.  G;  T.  R.  100 

Mutual  fire  insurance  companies , St.  G 

What  taxable T.  R.    98 

Mutual  marine  insurance  companies St.  G(c) 

Net- 
Deductions  allowed  for  ascertaining St.  B 

Defined  A20;  T.  R.      3 

Not  subject  to  withholding  at  source,  to  be  covered 

in  personal  return  T.  R.    32 

Note  given  in  payment  of;  maker  of  note  is  debtor 

and  source;  required  to  withhold,  except,  when.  T.  R.    68 
Of  corporation  engaged  in  more  than  one  class  of 

business,  how  ascertained  T.  R.  113 

Of  corporations,  verified,  how T.  R.  183 

Penalty  for  divulging  information  on  or  exhibit- 
ing returns,  section  3167 St.  I 

Returns  of,  filed,  are  public  records;    inspection 

of,  who  may  and  for  what  purpose St.  G(d) 

Shall  include  what St.  A;   St.  G 

Tax  paid  at  source,  deducted  in  ascertaining  taxable.  .  T.  R.      3 
On,  from  coupon  or  registered  interest  to  be  de- 
ducted and   withheld,  except  to  extent  exemp- 
tion claimed T.  R.    44 

Taxable — 

Defined    T.  R.      3 

For  normal  tax,  what,  how  ascertained St.  A;  T.  R.      7 

Persons  subject  to  T.  R.      1 


416  Index 

Income — Continued. 

Subject  to  additional  tax St.  A 

What  not  liable  to  withholding  at  source T.  R.    32 

Withheld,  what,  when,  by  whom St.  E 

Indirect  taxation   A7 

Individual: 

Duty   of,    collection    interest    coupons   originating   in 

United  States T.  R.    39 

Husband  and  wife  living  together,  citizen  or  resident 

alien,  exemption  $4,000 T.  R.    10 

Income  accruing  to,   from   contract  with   State,   etc., 
prior  to  passage  of  act  for  construction,  operation, 

or  maintenance,  public  utility,  taxable T.  R.    93 

Income  less  than  $20,000  required  to  make  return,  ex- 
cept when  T.  R.    19 

Income  of,  liable  to  withholding  at  source  on  and  after 

November  1,  1913  T.  R.    29 

Liable  for  income  tax  on  share  of  net  earnings  of  part- 
nership         T.  R.    47 

Married  and  not  living  with  husband  or  wife,  amount 

exemption  T.  R.      9 

Normal  tax,  what T.  R.      1 

Partnership  profits  included  in  return  of  and  tax  paid, 

not  reported  as  income  again T.  R.    14 

Residing  in  foreign  country,  where  to  file  return ...     T.  R.    15 
Return — 

For  calendar  year   T.  R.      4 

Required   of  guardian,   etc.,  notice  of   failure  to 

make,  served,  when  T.  R.    18 

When  to  be  made T.  R.  190 

Share  of  earnings,  partnership,   property  of,  subject 

to  tax  chargeable  to  individual T.  R.    94 

Share  of  partnership  profits  to  be  included  in  personal 

return    T.  R.    13 

Single,  allowable  exemption  for T.  R.      9 

Status  for  claiming  exemption,  determined  as  of  time 

of  claim T.  R.    10 

Who  may  claim  exemption,  paragraph  C A58;  T.  R.  9, 10 

Information: 

Prom  returns  to  officers  of  State,  when,  what,  how. . .     T.  R.  179 

To  be  given  by  collectors T.  D.  1956 

Inquiries  answered  by  collectors T.  D.  1956 

Insane: 

Who  make  claim  for  deductions  for T.  R.  33b 


Index  417 

Inspection  : 

Of  returns,  how A41;  T.  D.  1962;  T.  D.  2016;  T.  R.  178 

Insurance: 

Accident    T.  D.  2136 

Life- 
Paid  to  beneficiaries  not  to  be  included  in  gross 

income,  when    T.  R.      5 

Payment  credited  to  insurance  not  to  be  included 

in  gross  income,  when T.  D.  2090;  T.  R.      5 

Received  by  insured  not  to  be  included  in  gross 

income,  when T.  R.      5 

Insurance  commissions  taxable T.  D.  2011 

Insurance  company  (A43): 

"Deductible  net  addition  to  reserve";  definition;  what 

basis  of  computation  of;  what  not  to  be  included  in.  T.  R.  147d 

Deduction,  claims  actually  paid  under  policy  contract.  T.  R.  147c 
Depreciation  loss  by  shrinkage  in  property  value,  what 

and  when  deductible  T.  R.  147b 

Gross  income,  definition    T.  R.  97, 101 

Income  to  be  stated  separately St.  G(b) 

Losses — 

Actually  sustained   St.  G 

Deduction  for  what T.  R.  147a 

Making  false  return,  penalty St.  F 

Mutual  marine,  deduct  what T.  R.  147d 

Neglecting  to  make  return,  penalty St.  F 

Net  addition  to  reserve  St.  G(b) 

Net  income,  source,  time  of  accrual,  return  of St.  G 

Notice  of  assessments  to St.  G(c) 

Penalty  for  failure  to  pay  tax St.  G(c) 

Refusing  to  make  return,  penalty St.  F 

Reserve — 

Definition    T.  R.  147d 

Fund,  how  treated  St.  G(b) 

To  meet  losses,  how  treated T.  R.  147c 

Returns  of,  when  available St.  G(d) 

Salvage,  how  treated  in  return  of T.  R.  147c 

Special  excise  tax,  how  computed,  time,  what St.  S 

To  make  return  of  others,  when St.  E 

Interest  (A22) : 

Coupon  or  registered,  originating  or  payable  in  the 

United  States,  who  to  withhold T.  R.    39 

From  what  obligation  not  subject  to  tax  and  certifi- 
cates of  ownership  not  required T.  R.    37 

27 


418  Index 

I  ntebest — Continued. 

How  treated p.  258 ;     T.  R.    63 

On  deposits — 

Part  of  gross  income T.  R.      4 

Subject  to  withholding;  must  be  included  in  per- 
sonal return,  whether  paid  or  not T.  R.    67 

On  obligations  of  State  or  political  subdivision  of 
United  States  or  possessions,  not  part  of  gross  in- 
come  A28;  T.  D.  1892;     T.  R.      5 

Paid  as  rental  by  corporation,  how  treated T.  R.  148 

Paid  by  bank,  etc.,  on  deposits,  etc.,  allowable  deduc- 
tion     A38;     T.  R.  149 

Paid  by  corporation — 

At  different  rates,  rule  for  application  of  deduc- 
tion of  T.  R.  151 

Deduction  of  what,  when T.  D.  1960;     T.  R.  148 

On  indebtedness  secured  by  collateral  subject  to 

sale,  deductible  when,  why T.  R.  150 

On  mortgage  on   property  in   which  corporation 

has  equity  or  is  purchasing,  how  treated T.  R.  148 

Part  of  gross  income T.  R.      4 

Payment  of,  to  beneficiaries  by  insurance  companies, 

part  of  gross  income T.  R.      5 

Registered,  certificate  claiming  exemption  to  be  filed 

at  least  five  days  before  due-date  of  interest T.  R.    44 

Registered,  duty  of  debtor  before  payment  of T.  R.    41 

Inventors: 

Earnings   of,    indefinite   or   irregular   not   subject   to 

withholding    T.  R.    32 

Inventory: 

Corporation,  purpose  and  use  of,  kinds  of T.  R.  161 

J 

Joint  income  husband  and  wife A52 

Joint-stock  company: 

Assessment  against,  payable   St.  A;  St.  G(c) 

Deductions  allowable  to T.  R.      9 

Income — 

How  ascertained    St.  G(b) 

To  be  separately  stated   St.  G(c) 

Losses  actually  sustained   St.  G(b) 

Neglecting  to  make  return,  penalty St.  F 

Net  income  from  all  sources St.  G(b) 

Net  income  taxable  for  preceding  calendar  year St.  G(a) 

Notice  to  be  given  of  assessments St.  G(c) 


Index  419 

Joint-stock  company — Continued. 
Penalty  for  failure — 

To  make  return St.  G(c) 

To  pay  tax  St.  G  (c) 

Return — 

False,  penalty  for St.  F 

For  others  made  by St.  E 

Net  income  to  be  shown  on St.  G(c) 

Refusing  to  make,  penalty St.  F 

When  available St.  G(d) 

When  to  make   St.  G(c) 

Special  excise  tax  and  how  computed St.  S 

Judges: 

United  States  courts,  salaries  exempt,  what.T.  D.  2090;  T.  R.      6 
Jurisdiction  : 

Of  courts  St.  K 

L 

Labob  organizations: 

Exempt   St.  G(a) 

Landlord  : 

Rents    T.  D.  2090 

Last  dub  date: 

Defined    T.  R.  176 

Laws  (See  Statute) : 

Income  tax  laws   A14 

Relating  to  assessment,  remission,  collection,  refund- 
ing    St.  L 

Lawyers  : 

Fees,  indefinite  or  irregular,  not  subject  to  withhold- 
ing       T.  R.    32 

Legacy  T.  D.  2090 

Lessees  or  mortgagors: 

Make  return  for  others,  when St.  E 

Liability  : 

To  tax  of  a  taxable  person  not  to  be  released T.  R.    27 

License  (A55) : 

Bond  may  be  required  on  form  furnished T.  R.    66 

Failure  to  obtain,  penalty  for T.  R.    55 

For  branch,  to  be  made  through  principal  office T.  R.    57 

Form  of  application  for,  to  be  made  to  collector  of  dis- 
trict         T.  R.    55 

Form  of;  to  be  issued  by  collector,  good  until  revoked.     T.  R.    55 
Required  for  collection  of  interest  or  other  foreign 

items,  when,  by  whom,  where  obtained St.  E;     T.  R.    54 


420  Index 

Licensee: 

First,  receiving  foreign  item  for  collection  to  withhold 
and  be  responsible  for  tax  and  to  note  fact  of  with- 
holding on  such  item T.  D.  2023;     T.  R.    58 

For  collection  of  foreign  items — 

Disposition  of  certificate  accompanying,  by T.  R.    61 

To  keep  record  showing  what T.  R.    62 

To  report  to  collector  (Form  1043),  what,  when. .     T.  R.    69 

Life  insurance  A30;  T.  D.  2137 

For  benefit  of  corporations p.  258 

Proceeds  of  policies,  when  to  be  excluded  from  gross 

income    St.  B;     T.  R.      5 

Life  insurance  company  (A43): 

Applied  surrender  values  and  consideration  for  sup- 
plementary contracts  both  to  be  added  and  deducted 

in  return T.  R.  102 

Deductions  from  gross  income,  what St.  G(a) ;     T.  R.  100 

Gross  income,  definition  St.  G;     T.  R.  101 

Supplementary  statement  attached  to  return  of,  show- 
ing what T.  R.  103 

Limitation,  statute  of: 

For  income  tax  purposes,  three  years T.  R.  177 

Lobbying  expense T.  D.  2137 

Lodge  system: 

Corporation  operating  under,  defined T.  R.    89 

Loss: 

Corporation — 

Deductible,  defined   A24;     T.  R.  124 

From  sale  capital  assets,  how  ascertained T.  R.  128 

From  sale  securities  below  par,  how  treated T.  R.  135 

Insurance  company,  deduction  for,  what T.  R.  147a 

Losses A24;  T.  D.  1989;  T.  D.  2005;  T.  D.  2090;  T.  D.  2135 

Removal  of  building  not  deductible,  why T.  R.  127 

Reserve  for,  not  deductible T.  R.  126 

M 
Maker: 

Of  note  given  in  payment  of  interest  held  responsible 

for  normal  tax  T.  R.    68 

Manufacturers  : 

Returns  of,  accessible  how,  penalty,  sec.  3167 St.  I 

Manufacturing  company: 

Gross  income,  definition   T.  R.  104 

Marine  insurance  company: 

Deductions  by   St.  G(c) 


Index  421 

Materials  and  supplies  on  hand: 

Deduction  by  corporation  on  account  of,  what T.  R.  123 

Mercantile  corporation  : 

Gross  income,  definition    T.  R.  105 

Mileage  T.  D.  2079;  T.  D.  2090 

Mine: 

Depreciation  St.  G(t>) 

Gross  value  at — 

Defined    T.  R.      6 

Corporation,  definition  T.  R.  142 

Operated  on  royalty  basis,  corporation,  deduction  for 
depletion  of  deposits  not  allowed  operating  corpora- 
tion        T.  R.  145 

Minor: 

Who  make  claim  for  deductions  for T.  R.  33b 

Miscellaneous  corporation: 

Gross  income  of,  definition T.  R.  106 

Monthly  list  return: 

Form  of,  what  to  contain,  to  be  filed  in  duplicate T.  R.    50 

Of  coupon  or  registered  interest  orders  received  with 

ownership  certificates,  form  of  and  what  to  show. . .     T.  R.    53 
Of  licensee  for  collection  of  foreign  item,  form  of,  what 

to  show,  with  whom  filed,  when T.  R.    59 

Summary  of,  when  to  be  filed  and  what  to  show T.  R.    50 

Totals  only  to  be  carried  into  annual  return T.  R.    51 

Mortgages  (T.  D.  2090): 

Interest  on,  when  subject  to  withholding St.  E 

Not  payable  in   United   States,   when    subject  to 

withholding    St.  E 

Paid  by  corporation  which  has  equity,  how  treated     T.  R.  148 
Of  corporation,  income  from,  subject  to  withholding, 

regardless  of  amount   T.  R.    37 

Mutual  companies: 

To  make  return  of  income;  definition  of  net  income, 

T.  D.  1933;  T.  D.  2161;     T.  R.    80 
Mutual  fire  insurance  company: 

Gross  income  of,  definition T.  R.    98 

Premium  deposits  returned,  what St.  G(b) 

Return  of   St.  G 

Supplementary  statement  attached  to  return  of,  show- 
ing what  T.  R.  103 

Taxable  income,  what T.  R.    98 

Mutual  marine  insurance  company: 

Deductions,   what    St.  G(c) ;   T.  R.  99,  147d 

Gross  income  St.  G(b) 


422  Index 

Mutual  mabine  insurance  company — Continued. 

Supplementary  statement  attached  to  return  of,  show- 
ing what  T.  R.  103 

N 
Names  : 

Arrangement  of,  in  list  by  collector T.  R.  188 

Natueal  deposits: 

Deduction  for  depreciation  of,  basis  and  limit  of T.  R.  141 

Necessity  foe  taxation  Al 

Net  income: 

Corporation — 

Engaged  in  more  than  one  class  of  business,  how 

ascertained   T.  R.  113 

For  1913,  how  ascertained T.  R.  159 

Prom  sale  of  capital  assets,  how  determined T.  R.  109 

Should  be  what T.  R.  158, 183 

Denned    A20;     T.  R.      3 

Foreign  corporation,  denned T.  R.  157 

Mutual  companies,  defined   T.  R.    80 

Nonresident  aliens   A45 

Forms  for,  etc T.  D.  1977 

Nonresident  Americans   A35 

Normal  tax   A16;     T.  R.      1 

Note: 

Given  in  payment  of  income;  maker  is  debtor  or 
source  and  must  withhold  on  entire  amount  of  note 
if  in  excess  $3,000,  except  allowance  exemption  or 

deduction  claimed   T.  R.    68 

Given  in  payment  of  interest;  failure  of  purchaser  to 
make  allowance  or  deduction  for  tax,  only  remedy 

is  against  vendor,  how T.  R.    68 

Notice: 

Answer  of  guardian,  etc.,  may  show  what T.  R.    18 

Assessment,  advance  preparation  of,  by  collector T.  R.  198 

Claiming  deduction  account  partnership  expense,  by 

whom  filed,  what  and  how T.  R.    47 

Collector  to  give  withholding  agent,  when  tax  with- 
held is  adjusted  in  assessment T.  R.  33c 

Form  1015  filed  by  fiduciary  with  other  withholding 

agent,  nothing  withheld  T.  R.    70 

Of  assessment;  failure  to  pay  tax;  make  return;  form 

of;  time T.  R.  197 

Of  claim  for  exemption  by  foreign  partnership,  when, 
what,  how T.  R.    48 


Index  423 

Notice — Continued. 

Of  failure  fiduciary  to  file  return,  served T.  R.    71 

Of   failure   to   make   return,   when    to   be   served   on 

guardian,  etc T.  R.    18 

To  delinquent,  failure  to  file  return  in  time T.  R.  196 

To  taxpayer,  of  amount  for  which  liable  as  on  or  be- 
fore June  1 T.  R.    25 

O 
Oath  of  affirmation: 

Required  in  verifying  returns T.  D.  2090;     T.  R.    22 

Obligations: 

Interest  on,  of  State  or  political  subdivision;  United 
States  or  possessions  not  part  of  gross  income.  A28; 

T.  D.  1892;  T.  D.  1946;     T.  R.      6 
Obligations  of  corporations,  etc.: 

Similar  to  bonds,  mortgages,  and  deeds  of  trust,  in- 
come from,   subject  to   withholding,   regardless   of 

amount    T.  R.    37 

Obsolescence: 

Of  patents,  deduction  for,  what,  how  determined T.  R.  138 

Officers: 

Of  State  or  political  subdivision  of,  compensation — 

Of  not  part  of  gross  income T.  R.      5 

Paid  by  United  States  is  part  of  gross  income. ...     T.  R.      5 

Of  the  United  States  making  returns  for  others T.  R.      9 

Regulations  designed  for  enforcing  compliance  with 
law Preface  to  Part  III 

On,  OR  GAS  TERRITORY  LEASED: 

Basis  of  deduction  for  depletion  of T.  R.  144 

On,  OR  GAS   WELLS   OR  MINES: 

Operated  on  royalty  basis,  deduction  for  depletion  of 

deposits  not  allowed  operating  corporation T.  R.  145 

Omitted  tax: 

May  be  assessed  and  with  penalty,  when T.  R.  184 

Opinions  (See  Cases). 
Organizations: 

Civic,  exemptions  St.  G(a) 

P 

Paid-up  capital  stock: 

Definition  of   T.  R.    95 

Partnership  (A36;  T.  D.  2090): 

As  such  not  subject  to  tax  and  not  required  to  make 
return  except  on  request  Commissioner  or  Secre- 
tary  T.   D.   1957;     T.  R.    12 


424  Index 

Partnership — Continued. 
Foreign — 

Composed  of  nonresident  aliens,  resident  aliens, 
and  citizens  of  United   States,  either  or  both, 

requisites  of  ownership  certificate  for T.  R.    49 

Owning  bonds,  etc.,  of  corporations,  etc.,  organ- 
ized or  doing  business  in  the  United  States  not 
subject  to  withholding  on  interest  of,  provided 

exemption  claimed   (Form  1016) T.  R.    48 

Individual  share  of  profits  of,  to  be  included  in  per- 
sonal   return   T.  R.    11 

Liable  only  in  individual  capacity St.  D 

Limited,    is   corporation    and   subject   to    corporation 

tax    T.  D.  2137;     T.  R.    86 

May  claim  deduction  for  expenses  of  business,  when 

and   how  T.  R.    14 

Members  of,  liable  in  individual  capacity  for  tax  on 
their  respective  shares  of  earnings  of,  whether  dis- 
tributed or  not St.  A2;  T.  R.    94 

Profits  of— 

Once  returned  and  tax  paid,  not  again   reported 

as  income  T.  R.    14 

To  be  included  by  individuals  entitled  to.  in  their 

personal   return    T.  R.    13 

Return  of,  when  to  be  made,  section  3173 St.  I;  T.  D.  2137 

Shall  forward  correct  statement  of  profits  and  names.  St.  D 

Share  of  profit  to  partners St.  D 

To  file  with  withholding  agent  notice  claiming  deduc- 
tion for  expense  of,  what  and  how T.  R.    47 

To  make  list  or  return,  how  and  when,  section  3173. . 

St.  I;  T.  R.    23 
When  required  to  make  return  must  make  complete 

and    correct   T.  R.    12 

Patents  : 

Deduction  for   (A56)  — 

Depreciation,  what,  and  how  determined T.  R.  137 

Obsolescence,  what,  how  determined T.  R.  138 

Payment: 

To  officer  authorized  to  receive St.  E 

Penalty : 

And  interest  for  nonpayment  when  due   and   for  10 

days  after  notice,  when St.  E 

Delinquent  tax — 

Amount  of,  and  how  determined,  not  assessed 
against  estates,  insane,  deceased,  or  insolvent 
persons    T.  R.    25 


Index  425 

Penalty  (A40;  T.  D.  1950): 

Compromises   T.  D.  2015 

Failure  to  make  return  in  prescribed  time  or  for  false 

or  fraudulent,  fine  or  imprisonment,  or  both St.  G(d) 

Failure  to  pay  tax,  5  per  cent  to  tax  plus  1  per  cent 

per   month  T.  R.  164 

False  claim  or  statement  to  secure  exemption. .  .St.  E;  T.  R.  33a 
False  or  fraudulent   return  with  intent  to  evade  or 

defeat  tax,   what T.  R.    26 

False  or  fraudulent  return,  100  per  cent  to  tax, 

St.  G(c);  T.  R.  164 

False  statement  in  regard  to  deduction St.  E ;  T.  R.  33b 

For  divulging — 

Information  on  return,  what T.  R.  181 

Unlawfully,    information   on    return,   fine   or   im- 
prisonment, or  both,  with  costs T.  R.  164 

Making  false  return St.  F 

Neglect  or  refusal  to  make  return St.  F;  T.  R.  164 

Person  or  officer  of  corporation  required  to  make  re- 
turn, making  false  or  fraudulent,  with  intent  to  de- 
feat or  evade  assessment T.  R.  164 

Refusal  or  neglect  to  make  return,  liable  person,  cor- 
poration, etc St.  F;     T.  R.    26 

Refusal  to  make  or  for  false  return,  to  be  assessed 

and  collected,  what T.  R.    21 

Return  made  and  property  mailed  in  time  but  not  re- 
ceived in  time,  none T.  R.  174 

Pensions: 

Or  payments  on  account  of  injuries  to  employees  of 

corporations,   deductible   expense p.  259;     T.  R.  120 

Person : 

Whose  income  is  not  subject  to  withholding  at  source, 

make  personal  return  T.  R.    32 

Persons,  firms,  etc.: 

Collecting  foreign  items,  license  required St.  E 

Whatever  capacity  acting,  withholding  agent,  when, 

what   St.  D;  St.  E 

Who  must  make  returns A17 

Withholding  none  prior  to  November  1,  1913 St.  D 

Philippine  Islands: 

Exemptions     St.  G(a) ;  T.  R.  25,  26;  T.  D.  2090 

Place  of  filing  returns T.  D.  2137 

Place  of  making  returns A37 


426  Index 

Plant: 

Corporation,  deduction  for  depreciation    (in  addition 
to  the  deduction  for  depletion  of  mine),  what  and 

basis  of  T.  R.  143 

Political  subdivision  of  State: 

Interest  on  obligations  of,  not  part  of  gross  income. .     T.  R.      5 
Officers  and  employees  of,  compensation  not  part  of 

gross  income T.  R.      5 

Pollock  case A10 

Porto  Rico: 

Exemptions    and    provisions.  .  .   St.  G(a) ;  T.  R.  25,  26;  T.  D.  2090 
Possession: 

Of  United  States,  interest  on  obligations  of,  not  part 

of  gross  income T.  R.      5 

Power  of  attorney T.  D.  2090 ;  T.  D.  2137 

Premiums: 

Deductions  from,  by  whom,  when St.  E 

President  of  the  United  States: 

Salary  of.  exempt,  what T.  R.      5 

Procedure: 

In  case  of  refusal  or  neglect,  liable  individual  to  make 

return  or  for  false  return  made T.  R.    21 

Professional: 

Fees  as  income A47 

Persons  whose  income  indefinite  or  irregular,  not  sub- 
ject to  withholding T.  R.    32 

Profit  or  loss: 

Corporation,  on  sale  of  capital  assets,  how  determined, 

T.  D.  2077;     T.  R.  110 
Profits  : 

For   taxable   purposes   of   those   arising   or   accruing 

within  calendar  year T.  R.      4 

From  any  source  part  of  gross  income T.  R.      4 

From  sales  and  trade T.  D.  2090 

Partnership,  individual  entitled  to  include  in  his  per- 
sonal   return   T.  R.    13 

Partnership  once  return  and   tax  paid,  not  reported 

as  income  T.  R.    14 

Share   of,    in   partnership   to   be   included    in    return 

of  individual   T.  R.    11 

Undivided  A39 

Promissory   note,  withholding T.  D.  2090 

Property : 

Received    by    gift,    bequest,    devise,    descent,    income 

from  but  not  value,  part  of  gross  income T.  R.      4 


Index  427 


Protest  against  tax   A54 ;  T.  D.  2131 

Public  records: 

Returns  are,  inspection  of  or  copies,  how T.  R.  178 

Public  utility: 

Income   from   accruing   to   State,    etc.,    exempt    from 

tax    T.  D.  2090;     T.  R.    93 

Purchaser  : 

Of  note  given  in  payment  of  interest,  failure  to  make 
allowance  or  deduction  of  tax  in  purchase  or  dis- 
count only  remedy  is  against  vendor T.  R.    68 

Q 
Quarters,  allowance  for T.  D.  2079 ;  pp.  234,  249 

R 
Rate  (See  A16): 

Deduction  for  depletion  of  mines,  etc.,  regulation  and 

limit  of   T.  R.  142 

Real  estate,  profits  from  sale  of pp.  247,  249,  285 

Receipts  : 

Separate  to  be  issued,  when T.  R.    25 

Record  : 

To  be  kept  by — 

Collecting  agent,  what T.  R.    40 

Licensee  for  collection  of  foreign  items,  what  to 

show     T.  R.    62 

Refund: 

Failure  to  make  claim  for  exemption  or  deductions 
with  withholding  agent  in  time;  only  remedy  is  by 

application   for   T.  R.  33c ;  T.  D.  2131 

Registered  interest: 

Certificate   claiming   exemption    from    tax   on,    to    be 

filed  at  least  five  days  before  due  date  of  interest.  .     T.  R.    44 
Regulations   (Part  3 — Pages  79-164): 

Designed  to  assist  taxpayer  and  officer  in  complying 

with  the  law Preface  to  Part  III 

Subjects  covered  and  arrangement  of Preface  to  Part  III 

Reimbursement  for  expenses T.  D.  2135 

Removal  of  buildings: 

Not  deductible  loss,  corporation,  why T.  R.  127 

Rent  (A48;  T.  D.  2090;  T.  D.  2135;  T.  D.  2137): 

Corporation,  cost  of  buildings  on  leased  ground  de- 
ductible,   when   T.  R.  115 


428  Index 

Rent — Continued. 

How    treated T.  R.    63 

Interest  paid  by  corporation  as,  how  treated T.  R.  148 

Part  of  gross  income T.  R.      4 

Repairs  : 

Deduction,    when   T.  R.  131 

Reserve: 

Assessment  insurance  company,  definition T.  R.  147d 

For  depreciation — 

Diversion   of,   correction T.  R.  133 

Use  of,  disposition  of  excess  of T.  R.  132 

For  insurance  of  corporate  property  not  deductible..     T.  R.  122 

For  losses  not  deductible T.  R.  126 

For  taxes  of  corporation  not  deductible T.  R.  156 

Insurance  company,  deductible  net  addition  to,  defini- 
tion; what  basis  computation;  what  not  to  be  in- 
cluded in   T.  R.  147d 

To  meet  loss,  insurance  company,  how  treated T.  R.  147c 

Resident  alien: 

Certificates  of  ownership  of  bonds,  when  and  how  to 

be  used  and  to  specify  what T.  R.    42 

Income  of,  from  coupon  or  registered  interest,  subject 
to  withholding  except  to  extent  exemption  claimed.     T.  R.    44 
Returns  (A17)  : 

Administrators  to  make  for  heirs,  when T.  R.      9 

Agents  to  make  for  others T.  R.      9 

Annual  individual  and  monthly  list  to  be  forwarded 

to  Commissioner,  how T.  R.    24 

Annual  list   (Form  1013),   to  show  what,  and  to  be 

filed  on  or  before  March  1 T.  R.    50 

Annual,  of  coupon  or  registered  interest  orders  not 
accompanied  by  certificates  of  ownership;  form  of, 
and  what  to  show;  to  be  filed  when;  to  show  totals 

only  on  monthly  return T.  R.    53 

Annual,   of   debtors   or   withholding   agents   to   show 

totals  only  on  monthly  list T.  R.    51 

Annual,  fiduciary  to  collector  of  district,  when;  show 

what     T.  R.    71 

Annual,  of  withholding  agent,  form  for,  to  be  accom- 
panied by  what,  when  to  be  filed T.  R.    35 

Annual,  of  withholding  agent   (Form  1042),  what  to 

show  and  when  to  be  filed T.  R.    69 

Approval  of  Secretary T.  R.      7 

Blanks  for,  furnished  corporations  by  collector T.  R.  163 

By  persons  of  lawful  age T.  R.      7 


Index  429 

Returns — Continued. 

Certified  copies  of,  when,  why,  delivered  to  whom   ...  T.  R.  180 

Conservators  to  make  for  others T.  R.      9 

Copy  not  retained  by  collector T.  D.  2024 

Copy  of,  unlawful  to  exhibit,  section  3167 St.  I 

Corporation — 

Every,  not  specifically  exempt,  to  make T.  R.   80 

Fiduciaries,  withholding  agents,  when  to  be  made.  T.  R.  190 
Going  into  liquidation  to  make  final;   filed  when 

and   where  T.  R.    85 

Not  receiving  blank  for,  should  make  application 

for,  to  whom,  when T.  R.  163 

One  only  for  1913 T.  R.  160 

Organized  during  year,  to  make T.  R.    84 

To  make  complete  or  not  accepted T.  R.  163 

When    income    paid    by    lessee    direct    to    stock- 
holders, must  nevertheless  make T.  R.    80 

Divulging — 

Information  from,  penalty T.  D.  1962;  T.  R.  181 

Unlawfully,  information  on,  penalty T.  R.  164 

Due  date  on  Sunday  or  legal  holiday,  effect  of T.  R.  176 

Duplicate,  when,  of  whom  required,  disposition  of. . 

T.  R.  193;  T.  D.  2024 
Duty  of  collector — 

In  forwarding  and  investigation  of T.  R.  192;  T.  D.  2024 

On  failure  to  find  person  at  home,  section  3173. .  St.  I 

Employees  to  make  for  others St.  E 

Evidence  by  which  to  verify,  what T.  R.  183 

Executors  to  make  for  others St.  E 

Extension  of  time — 

For  filing,  when,  what,  how T.  R.    23 

To  make,  not  to  exceed  what,  how,  to  whom  made.  T.  R.  173 
Failure  of  corporation  to  receive  blank  for,  not  ex- 
cused from  making  return  or  penalties  for  failure.  .  T.  R.  163 
Failure — 

Of  fiduciary  to  file,  notice  of,  served T.  R.    71 

To  make  by  guardian,  agent,  or  other  person  act- 
ing in  trust  capacity,  notice  to,  served  on T.  R.    18 

To  make  in  prescribed  time,  of  a  false  or  fraudu- 
lent, penalty    T.  R.  164 

To  make — 

Legal   provisions  as  to St.  I 

Notice  of.  form  and  time  to  serve T.  R.  197 


430  Index 

Returns — Continued. 

False  or  fraudulent — 

Duty  of  collector  in  matter  of T.  R.  192 

Penalty     St.  F;     T.  R.  164 

With  intent  to  defeat  or  evade  tax,  penalty T.  R.    26 

Fiduciary — 

Having    income    not    distributed;     what    to    be 

shown;  tax  to  be  withheld  and  paid  when T.  R.    24 

Must  be  made  when T.  R.    71 

Not  to  include  income  on  which  tax  paid T.  R.    71 

To  include  only  matter  within  scope  of  authority.     T.  R.    72 

What  to  show,  and  how  executed T.  R.    73 

Filing,   place  T.  D.  2137 

For  1913,  must  be  on  new  form  and  not  on  excise  form 

heretofore    used   T.  R.  172 

Foreign  corporation  having  more  than  one  branch 
office  in  United  States  to  designate  principal  office 

and  person  to  make  return T.  R.    83 

Form  of  for  corporation  prescribed T.  R.  163 

For  persons  absent  from  United  States,  by  whom  made  St.  E 

For  persons  incapacitated,  by  whom  made St.  E 

Fraudulent — 

Duty  of  collector St.  I 

Extra  tax  because  of St.  E 

Time  limitation  for  paying  after  notice St.  E 

Husband  and  wife,  net  income  both   exceeds  $4,000, 

of  combined  income,  required T.  R.    10 

Husband  and  wife  not  living  apart,  separate  income 
from  separate  estate  may  be  made  on  one;  sepa- 
rately   stated    and    with    names    and    addresses    of 

both    T.  R.    10 

Husband  or  wife,  either  having  net  income  $3,000  or 
over,  required,  and  must  include  income  of  both. .  .       T.  R.    10 

Husband  should  make  for  himself  and  wife T.  R.    10 

Individual — 

For  calendar  year T.  R.      4 

Made  by  collector  when T.  R.    20 

Not  required  to  make,  when  made  by  other  for 

him,  when    T.  R.    19 

To  be  made  when A37 ;     T.  R.  190 

To  include  share  of  partnership  profits  in T.  R.    13 

Information  or  copies  from,  to  officers  of  State,  when, 

what,  how,  original  not  removed  except T.  R.  179 

Last  due  date  defined  T.  R.  175 

Leased  corporations  make  their  own T.  R.    82 


Index  431 

Returns — Continued. 

Legality  of,  made  by  collector  or  deputy,  section  3176.  St.  I 

Lessee  corporation  assuming  debts  of  lessor  to  include 

in  lessee  return  all  receipts  of  lessor T.  R.    81 

Lessee  corporation  not  to  include  in  its  own  statement 
of  capital  stock,  that  of  lessor;  nor  in  its  own  state- 
ment of  indebtedness,  that  of  lessor  except  when 

said  indebtedness  is  assumed  by  lessee T.  R.    82 

Life  insurance  company — 

Applied  surrender  values  and  consideration  for 
supplementary  contracts  both  added  and  de- 
duced         T.  R.  102 

Supplementary  statement  attached  to  return  of, 

showing  what   T.  R.  103 

Made  and  properly  mailed  in  time,  no  penalty  if  not 

received   in   time T.  R.  174 

Made  by  guardian  or  authorized  agent,  when T.  R.    17 

Made  on  basis  of  fiscal  year  but  not  so  designated,  not 

accepted,  and  must  be  made  for  calendar  year T.  R.  171 

Made  to  collector St.  E 

Monthly,  by  withholding  agent,  when  to  be  filed;  with 

whom,  what  to  accompany T.  R.    35 

Monthly  list  and  annual,  by  licensee  for  collection  of 

foreign  items,  what,  to  whom,  when T.  R.    59 

Monthly  list,  form  of,  what  to  contain,  to  be  filed  in 

duplicate     T.  R.    50 

Monthly  list  of  coupon  or  interest  orders  not  accom- 
panied by  certificates  of  ownership,   form   of,  and 

what  to  show T.  R.    53 

Must  be  made,  when,  section  3173 St.  I 

Mutual  companies  to  make;  definition  net  income. . .     T.  R.    80 
Mutual  fire  insurance  companies,  supplementary  state- 
ment attached  to,  showing  what T.  R.  103 

Mutual  marine  insurance  companies,   supplementary 

statement  attached  to,  showing  what T.  R.  103 

Neglect  or  refusal  of  liable  person,  corporation,  etc., 

to  make,  penalty T.  R.    26 

Neglect  or  refusal  to  make,  50  per  cent  additional  tax.     T.  R.  164 

Neglect  to  make,  penalty St.  F 

Nonresident  alien,   agent  or  representative  to  make 

for,  when,  what  to  be  included  in T.  R.      8 

Not  filed  in  time,  notice  sent  to  delinquent T.  R.  196 

Not  required,  income  not  exceeding  $3,000 St.  D 

Officers  and  employees  of  the  United  States,  having 
control  salaries,  rents,  etc.,  to  make  when St.  E 


432  Index 

Retubns — Continued. 
Of  income — 

Persons  deceased   within   taxable  year,   made  by 

executor  or  administrator T.  R.    17 

When  required,  where  filed T.  R.    15 

On  basis  of  calendar  year  or  fiscal  year,  time  of  assess- 
ment and  payment  of  tax T.  R.  177 

One  deduction  only  of  exemption St.  D 

One  to  cover  both  special  excise  and  income  tax  for 

1913  for  corporation St.  S 

Open   to   inspection,   when St.  G(d) 

Partial  or  tentative         p.  291 

Partnership   profits   included   by   individual   and   tax 

paid,  not  again  reported  as  income T.  R.    14 

Partnership,  requisite  of T.  R.    12 

Penalty— 

Against  corporation  for  failure  to  make T.  R.  163 

For  failure  to  make  at  time  specified St.  G(d) 

For  refusal   to  make St.  F 

Personal,    Form    1040;    fiduciary    may    be   appointed 

agent  or  attorney  to  make  for  beneficiary T.  R.    72 

Personal  not  required,  when T.  R.      8 

Person   or  officer   of   corporation   required   to   make, 
making  false  or  fraudulent  with  i,ntent  to  defeat  or 

evade ;   penalty   T.  R.  164 

Person  residing  in  foreign  country,  provision  for....  T.  R.      7 

Place  for A37 

Public  records,  inspection  or  copies,  how St.  G(d) 

Receivers  to  make  for  others T.  R.      9 

Refusal   or  neglect  of  liable  individual,  duty  of  col- 
lector     St.  I;  T.  R.    21 

Refusal  to  make,  extra  tax St.  E 

Requisite  of  bookkeeping  for  verifying T.  R.  182 

State  officer  may  have  access  to St.  G(d) 

Statistics  of  returns pp.  369-380 

Time  for   A37 

To  be  filed,  when St.  D 

To  be  made  on  Form  1040  for  individuals T.  R.    16 

To  be  made  to  collector St.  D;   St.  E 

To  be  verified,  how,  before  whom St.  D;   St.  I 

To  include — 

Personal  income  not  subject  to  withholding T.  R.    32 

Share  of  profits  in  partnership  whether  divided 

or  not    T.  R.    11 


Index  433 

Retubns — Continued. 

Trustees  to  make  for  others St.  E 

Understatement  of  income,   cause  to  be  shown   why 

amount  not  increased St.  D 

Undervaluation  or  understatement St.  I 

Unlawful    to    exhibit    or    divulge    information    from, 

section   3167    St.  I 

What  must  be  shown  on T.  R.    16 

When  to  be  made;  where  filed,  section  3173 St.  I;  A37 

Who  must  make A17 

Wife  having  income  of  $3,000   from   separate  estate 

managed  by  herself  may  make  her  own T.  R.    10 

Withholding  agent,  what  disposition  of;  should  not 
be  filed  until  expiration  of  time  allowed  for  filing 

claims   for  exemption   or   deductions T.  R.  33c 

Revenue  statistics    pp.  369-380 

Revised  Statutes: 

Amended  sections  of,  providing  duties  and  penalties, 

sections  3167,  3172,  3173 St.  1 

Royalties  : 

How  treated    T.  R.    63 

Royalty  basis: 

Mines,  oil  or  gas  wells,  operated  on,  deduction  for 
depletion  of  deposits  not  allowed  operating  corpora- 
tion          T.  R.  145 

Rulings,  Treasury   p.  166 

S 
Salaries  (A31;  T.  D.  2137): 

How  treated  T.  D.  2090;  T.  R.  4,  63;  p.  298 

Sale  of  capital  assets: 

Corporation — 

Income  from,  how  determined T.  R.  108, 109 

Loss  from,  how  ascertained T.  R.  128 

Profit  or  loss  on T.  R.  110 ;   p.  227 

Sales: 

Income  from   A50 

Salesmen: 

Commission    to,    paid    in    stock,    deductible    expense 

when    T.  R.  117 

Salvage: 

How  treated  in  return  of  insurance  company T.  R.  147c 

Scientific  association: 

Exemptions    St.  G(a) 

Scrip T.  D.  2090;  T.  D.  2152 

28 


434  Index 

Securities  : 

Income  from;  sale  of,  below  par;  loss T.  R.  4, 135 

Sheinkage: 

In  book  value  capital  assets,  how  treated T.  R.  134 

In  property  value  insurance  company,  depreciation 
loss  by,  what  and  when  deductible p.  299;   T.  R.  147b 

Sinking  fund   taxable T.  D.  2161 

Sixteenth  amendment  A12 

Size: 

Foreign  items  too  small  for  notation  on,  statement 
may  be  attached  to T.  R.    58 

Society  : 

Operating  under  the  "lodge  system,"  denned;  exemp- 
tions    St.  G(a) ;     T.  R.    80 

Source: 

Denned    T.  R.    31 

Example  of  where  and  where  not  withholding  at T.  R.    32 

Fiduciary  is,  when T.  R.    70 

Note  given  in  payment  of  income,  maker  of  note  is.  .     T.  R.    68 
Persons,  firms,  etc.,   acting  as,   designated   "debtors" 

or  "withholding  agents" „ T.  R.    31 

Tax  withheld  at,  to  be  paid  to  collector T.  R.    34 

Withholding  at,  applies  only  to  normal  tax  imposed  on 

individuals     T.  R.    29 

Who  required  to  act  as;  liable  for  tax  withheld T.  R.    30 

Special  assessment  districts T.  D.  1946;  pp.  244,  252 

Special  rulings,  Treasury -. p.  165 

Special  tax: 

See  sections  3173,  3176 St.  I 

State: 

Information  from  return,  when,  how T.  R.  179 

Officers  and  employees,  paid  by  United  States;  com- 
pensation part  of  gross  income T.  R.      5 

Political  subdivision  of,  compensation  of  officers  and 
employees  not  part  of  gross  income;  interest  on  ob- 
ligations of,  not  part  of  gross  income T.  R.      5 

State  income  taxes A5 

State  or  United  States: 

Construction;  exemptions,  distinction  as  to,  for  cer- 
tain income  from  State,  etc St.  G(a) ;   St.  H 

Statistics,  Part  VII pp.  369-380 

Status  : 

For  claiming  exemption  by  individuals T.  R.    10 

Statute,  Income  Tax,  complete pp.  41-75 

Analysis    pp.  1-39 


Index  435 

Statute,  Income  Tax — Continued. 

Divisions  (See  Table  of  Contents). 

Excise  Tax  Law All 

History   A14 

Statute  of  limitations: 

For  income-tax  purposes,  three  years T.  R.  177 

Stock : 

Paid-up  capital,   definition T.  R.    96 

Profit  and  loss  from  sale  of A50;  T.  D.  2090;  A24 

Subsistence     T.  D.  2090;  T.  D.  2079 

Substitute  certificates   T.  R.    40 

Summaet  of  income  tax  law  (See  Introduction). 

SUMMABY  OF  MONTHLY   LIST  BETUBN T.  R.     50 

Summons,  section  3173 St.  I 

Sunday  ob  legal  holiday T.  R.  176 

Supertax    A16 

Supplementary  statement  attached  to  return. T.  D.  2137;  T.  R.  103 

Supplies  on  hand T.  R.  123 

Supreme  Court  opinions  (See  Cases). 

Surplus  A39 

Surtax A16 

T 

Tax  (Theory  and  History,  Al-14): 

Additional,  on  individuals  only,  rates  and  classes. ...  T.  R.      2 

Amounts  added  as  penalty,  section  3176 St.  I 

Assessment  and  collection T.  R.    25 

Assessment — ■ 

Against  income  withheld  at  source T.  R.    38 

Of,  against  withholding  agent  deferred T.  R.  189 

Claim  for  abatement  of T.  R.  33c 

Cooperative  dairies  exempt T.  R.    92 

Corporations — ■ 

Exempt   T.  R.    87 

On  entire  net  income T.  R.  185 

Organized  in  United  States,  all  (with  exceptions) 

subject  to  T.  R.    76 

Deductible A23 

Delinquent  if  not  paid  by  June  30 T.  R.    25 

Deputy  collectors,  duties,  section  3172 St.  I 

Domestic  building  and  loan  association,  what  neces- 
sary  to   exempt T.  R.    87 

"Duties"  are  not  but  item  of  cost T.  R.  155 

Evidence    of    nonliability,    received    by    withholding 
agent,  disposition  of Preface  to  Part  III 


436  Index 

Tax — Continued. 

Evidence  of  payment  of,  by  corporation  for  deduction 

purposes    T.  R.  158 

Excise  on  corporation T.  R.  160-191 

Extra  St.  E 

Failure  to  pay T.  R.  164, 177, 197 

Fixed  determinable  annual   income,  subject  to  with- 
holding     T.  R.  65,  66 

Fraternal  societies,  exempt St.  G(a) 

From  withholding  agent   T.  R.    36 

Income  of  corporations  organized  elsewhere  than  in 

the  United  States,  liability T.  R.    79 

Individual — 

Income  from   public  utility  taxable  when T.  R.    93 

Net  income  over  $3,000  annually,  liable  to T.  R.      9 

Normal — 

Agricultural,    horticultural,   and    labor   organiza- 
tions, certain  mutual  savings  banks,  exempt...  St.  G(a) 

Computation    of   T.  R.  1,  7 

Deductions  in  connection  with St.  E;  T.  R.    41 

Not  to  be  withheld  against  "partnership  profits..  T.  R.    47 

Not  to  be  withheld  on  bank  deposits T.  R.    67 

Omitted,  procedure  upon  discovery  of T.  R.  184 

Once  withheld,  subsequent  withholding  agent,  exempt 

on  filing  certificate  (Form  1006) T.  R.    34 

On  excess  of  income  over  exemption T.  R.    10 

On  income — 

From  bonds,  etc.,  corporations,  etc T.  R.    37 

Paid  by  note T.  R.    68 

On  interest  on  bonds  owned  by  corporations  organized 

in  United  States  T.  R.    45 

On  net  income  of  corporation — 

Computation  of  T.  R.  159 

Distributable  to  owners  T.  R.    79 

Rate  of  A16 

On  net  income  of  foreign  corporation;  definition;  de- 
duction      T.  R.  157 

Paid  by  corporation,  when  not  deductible. .  .T.  D.  1948;  T.  R.  153 
Partnership  limited  is  corporation  and  subject  to  cor- 
poration tax T.  R.    86 

Penalty  on  delinquent   T.  R.    25 

Receipts  to  be  given  by  collector St.  J 

Returns  of,  to  be  made,  section  3173 St.  I 

Special  excise   St.  S 

Taxable  person  not  to  be  relieved  from  liability T.  R.    27 


Index  +37 

Tax— Continued. 

To  be  paid T.  R.  177 

To  be  withheld  T.  R.  44,  64 

Withheld— 

At  source,  to  be  paid  to T.  R.    30 

By  first  licensee,  fact  of  withholding  noted T.  R.    58 

Collector  to  adjust   in  assessment  against   with- 
holding agent T.  R.  33c 

From  what T.  R.  64,  75 

To  be  paid  to  collector T.  R.  33c,  34 

Taxable  income: 

Definition ;  liability  T.  R.  3,  7 

Tax  due T.  R.  187 

Tax-free  covenant  clause.  .   A23;  T.  D.  1948;  pp.  232,  292;  T.  D.  2161 
Taxes: 

Paid  by  corporation  constitute  deduction T.  R.  152 

Reserve  for,  by  corporation  not  deductible T.  R.  156 

Taxpayer: 

Regulations  designed  to  assist Preface  to  Part  III 

Tax  statements  T.  R.  199 

Tax  year  1913  T.  R.      7 

Trustee: 

As  fiduciary  T.  R.    70 

Duties  of  T.  D.  2137;   St.  E 

Teacher: 

Public  school  . . : T.  R.      5 

Theory  of  taxation  .' A2 

Timberland: 

Deduction  for  depreciation — 

Account  removal  of  timber T.  R.  139 

Limit  of,  excess  of,  is  income T.  R.  140 

Time  and  place  for  making  returns A37 ;   T.  D.  1950 

Time: 

Extension  of,  for  making  and  filing  return T.  R.  23, 173 

"Trade"  defined  p.  202 

Treating  as  expense p.  256 

Treasury  decisions  p.  165 

Treasury  regulations   pp.  79-164 

U 
Unearned  increment: 

Not  value  for  depreciation  purposes T.  R.  146 

Undivided  profits  A39 ;  T.  D.  2135 

"United  States"  or  "State": 

Construction St.  H 

Interest  upon  obligations  of T.  R.      5 


438  Ihdex 

v 
Value: 

Book,  capital  assets,  shrinkage  in T.  R.  134 

Gross  at  the  mine,  definition T.  R.  6, 142 

Of  property,  acquired  by  gift,  etc T.  R.  4,  5 

Shrinkage  in  property,  deductible T.  R.  147b 

Unearned  increment,  not  as  basis  of  deduction  for  de- 
preciation        T.  R.  146 

Voluntary  offerings   T.  D.  2090 

W 

Wages   A31;  T.  R.  4,  63 

Weab  and  tear  (See  Depreciation) . 
Wife: 

Having  income  of  $3,000  from  separate  estate  managed 

by  herself  may  make  return  of  her  own  income T.  R.    10 

Wife  and  husband: 

Combined   net   income   of  exceeds   $4,000,   return   re- 
quired, both  jointly  and  separately  liable  for  return 

and  tax  .- T.  R.    10 

Wife  or  husband: 

Either  having  income  $3,000  or  over,  return  required 

and  must  include  incomes  of  both T.  R.    10 

Withholding    A32 ;  T.  D.  2135 

At  source T.  R.    30 

Example  of  where  and  where  not T.  R.    32 

On  and  after  November  1,  1913 T.  R.    29 

On  bond  coupons   p.  292 

Pay  of  officers  T.  D.  2090 

By  exempt  corporations,  not  required T.  D.  1967 

By  first  licensee;  notation  by;  responsibility  of T.  R.    58 

Excess    T.  D.  2131 

From  what T.  R.    64 

Withholding  agent  (T.  D.  2135) : 
Annual  return  by — 

By,  when,  to  show  what T.  R.  50,  51 

Not  to  be  filed  until T.  R.  33c 

Of   (Form  1042),  when  to  be  filed,  to  be  accom- 
panied by  what  T.  R.  35,  69 

Assessment  of  tax  against,  deferred  until T.  R.  189 

Claim  for  exemption  and  deductions  filed  with.  .T.  R.  33ac;   St.  E 

Definition  of,  as  source T.  R.    31 

Disbursing  officer  T.  D.  2135 

Disposition  of  returns  of T.  R.  193. 


Index  439 

Withholding  agent — Continued. 

Duty  in  matter  of  certificates  of  ownership St.  E;  T.  R.    43 

Duty  of,  in  matter  of  claims  for  deduction.  .T.  D.  2135;  T.  R.  33c 

Duty  of,  in  case  of  foreign  partnership T.  R.    48 

Equipment  trust  notes p.  237 

Evidence  of  nonliability  to  tax  filed  with,  disposition 

of Preface  to  Part  III 

How  to  treat  substitute  certificate  of  collecting  agent 
and  certificates  of  owners  not  subject  to  having  tax 

withheld    T.  R.    51 

May  file  claim  for  abatement  of  tax T.  R.  33c 

Monthly  return  by,  when  to  be  made,  with  whom  filed, 

to  be  accompanied  by  what. .  .T.  D.  1973;  T.  D.  1997;  T.  R.    35 
Notice  filed  with,  claim  for  deduction,  account  partner- 
ship expense   T.  R.    47 

Not  to  withhold  against  nonresident  alien  or  foreign 
organization  doing  business  in  United  States,  when.     T.  R.    46 

Promissory  notes  T.  D.  2090 

Relieved  from  necessity  of  withholding,  when,  Preface  to  Part  III 

Rents  T.  D.  2137 

Return  of,  when  to  be  made T.  R.  190 

To  file  monthly  list  return,  form  of,  and  what  to  con- 
tain       T.  R.    50 

To  forward  to  collector  tax  withheld,  when.  .T.  D.  1965;  T.  R.  33c 
To   furnish  statement   of  claim   for   deductions   filed 

with  collector   T.  R.  33c 

To  pay  to  collector  tax  withheld T.  R.    64 

To  withhold  from,  what,  amount  of T.  R.  32,  65 

When  claim  for  deductions,  paragraph  B,  to  be  filed 

with,  duty  of T.  R.  33b,  66 

When  so  authorized,  may  file  return  of  withholding  in 

district  of  his  location  T.  R.    38 

Who  to  be,  in  cases  cited T.  R.    64 

Withholding  and  paying  agent: 

Of  debtor  in  United  States,  charged  with  duty  of  with- 
holding, when   T.  R.    39 

Witnesses: 

Jurisdiction  for  compelling  attendance St.  K 

Y 
Yeab: 

For  taxable  purposes  for  individual,  is  calendar  year .     T.  R.      4 
(See  fiscal  year  for  corporation.) 


DAY     AND    TO     $t-°  __^=. 

OVERDUE. 


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